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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-20985
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CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 06-1226727
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1265 HARBOR BAY PARKWAY, ALAMEDA, CALIFORNIA 94502
(Address of principal executive offices) (Zip Code)
(510) 749-5100
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 15, 2000, 20,536,915 shares of the registrant's common stock,
$.001 par value, were outstanding. The aggregate market value of the common
stock held by non-affiliates of the registrant (i.e., excluding shares held by
executive officers, directors, and control persons as defined in Rule 405) on
that date was $67,603,804 computed at the closing price of the common stock on
that date on the NASDAQ SmallCap Market.
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CALYPTE BIOMEDICAL CORPORATION
FORM 10-K
INDEX
PAGE
NO.
----
PART I.
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 21
Item 6. Selected Consolidated Financial Data........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 31
Item 8. Financial Statements and Supplementary Data................. 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 33
PART III.
Item 10. Executive Officers, Directors and Significant Employees of
the Registrant.............................................. 34
Item 11. Executive Compensation...................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 43
Item 13. Certain Relationships and Related Transactions.............. 44
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 46
Signatures.................................................. II-1
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K, THE MATTERS DISCUSSED HEREIN CONTAIN FORWARD-LOOKING STATEMENTS THAT
ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, UNCERTAIN MARKET ACCEPTANCE OF OUR NEW METHOD
OF DETERMINING THE PRESENCE OF HIV ANTIBODIES, LACK OF EXPERIENCE SELLING AND
MARKETING OUR HIV-1 URINE-BASED SCREENING TEST, LIMITED OPERATING HISTORY, AND
INABILITY TO OBTAIN ADDITIONAL FINANCING, IF NEEDED, AS WELL AS THE OTHER RISKS
AND UNCERTAINTIES DESCRIBED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
PART I
ITEM 1. BUSINESS
THE COMPANY
Calypte Biomedical Corporation ("Calypte" or the "Company") believes that it
is a leader in the development of a urine-based screening test for the detection
of antibodies to the Human Immunodeficiency Virus, Type-1 ("HIV-1"), the
putative cause of Acquired Immunodeficiency Syndrome ("AIDS"). The Company has
integrated several proprietary technologies to develop a test which, in clinical
trials, detected the presence of HIV antibodies in urine with 99.7% sensitivity
in subjects known to be HIV-1 infected (as identified through blood-based
screening tests). In subjects at low risk for HIV ("low risk subjects"), the
specificity of the screening test with a companion Western Blot supplemental
test was 100%. Calypte believes that its proprietary urine-based test offers
significant advantages compared to existing blood-based tests, including
ease-of-use, lower costs, and significantly reduced risk of infection from
collecting and handling specimens. Urine collection is non-invasive and
painless, and urine is the most commonly collected body fluid. The Company
estimates that the cost of collecting, handling, testing and disposing of urine
specimens will be significantly less than that of blood specimens. Independent
studies report that the likelihood of finding infectious HIV virus in urine is
extremely low, which greatly reduces the risk and cost of accidental exposure to
health care workers, laboratory personnel, and patients being tested.
In August 1996, the Company received a product license and an establishment
license from the Food & Drug Administration ("FDA") to manufacture and sell, in
interstate and foreign commerce, the Company's urine-based HIV-1 screening test
for use in professional laboratory settings. In May 1998, Cambridge Biotech
Corporation ("Cambridge Biotech") also received such licenses from the FDA with
respect to the urine HIV-1 Western Blot test that confirms the presence of
antibodies to HIV-1 in urine samples. This test is used on samples that are
repeatedly reactive in Calypte's HIV-1 urine antibody screening test. Calypte's
screening test, when used with the Western Blot supplemental test for urine,
provides the only complete FDA-approved urine-based HIV testing method.
In December 1998, Calypte acquired from Cambridge Biotech certain assets
relating to Cambridge Biotech's Western Blot product line for certain infectious
diseases. The acquisition included the urine-based and serum-based HIV-1 Western
Blot products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
In November 1999, Calypte received FDA approval of a "Day Assay" format for
its "Cambridge Biotech" HIV-1 Western Blot assay. The FDA approval now permits
use of this supplemental test in either a "Day Assay" (five hour) or overnight
format, and will provide more rapid test results for customers and their
patients who need the results of their HIV tests as rapidly as possible.
The Company intends to develop additional or improved urine and blood-based
tests for other infectious and viral diseases. The Company will also continue to
explore the potential for an over-the-counter in-home urine collection kit.
Calypte markets its urine-based HIV-1 screening test through direct sales
personnel and distributors depending upon the market segment and the location of
the market. Calypte believes that its urine-based tests offer significant
advantages in terms of safety, cost, convenience, and painless collection of the
fluid to be tested. There can be no assurance that the Company's products or the
Company's planned products will receive or maintain FDA clearance or approval
and become commercially available.
3
BACKGROUND
HIV is the putative cause of AIDS, which is a leading cause of death for
persons ages 25 to 44 in the U.S. Those infected with HIV generally do not show
symptoms of AIDS until several years after HIV infection, if at all. Because
most persons infected with HIV are asymptomatic for AIDS and are unaware of
their HIV status, such persons do not avail themselves of medical treatment and
may unknowingly expose others to the risk of infection. Prior exposure to HIV
can be detected in laboratory tests even though the individual infected with HIV
is asymptomatic.
According to the World Health Organization and the Joint United Nations
Programme on HIV/AIDS, by the end of 1999, an estimated 50 million people have
been infected with HIV, of whom over 16 million have already died from the
disease, and each day 16,000 more become infected. HIV is spread by a transfer
of bodily fluids primarily through sexual contact, blood transfusions, the
sharing intravenous needles, accidental needle sticks and transmission from
infected mothers to newborns. The World Health Organization reports that about
2.2 million people died of AIDS in 1998 and the annual death toll is likely to
continue to rise for years to come.
The discovery in 1984 of circulating HIV antibodies in the blood led to the
development and widespread use of HIV blood screening tests. Testing by blood
banks of blood used in transfusions soon followed in an effort to maintain and
protect the integrity of the blood supply. Most HIV antibody screening tests are
enzyme immunoassays ("EIAs"). These tests operate on the principle that
antibodies will react with a known antigen; this reaction is detected by using
enzymes as indicators. Outside of blood bank screening, physicians, the life
insurance industry, the military, the criminal justice system, and the
Immigration and Naturalization Service generate the largest domestic demand for
HIV testing.
To minimize the risk of incorrectly reporting that an individual is infected
with HIV (a false positive result), most countries require a strict testing
protocol. The protocol is to first test a sample for the presence of HIV. Any
sample found to be reactive in the initial screen is then retested in duplicate.
If either of the retests are reactive, the same sample is tested again using a
more precise and expensive supplemental test. The presence of HIV antibodies,
based on the results of the supplemental test, is considered diagnostic for HIV
infection.
HIV blood testing can be expensive and poses risk of infection to health
care personnel. The typical HIV screening test requires a trained health care
worker or phlebotomist to draw and centrifuge a blood sample, which is then
tested for the presence of HIV antibodies. Blood is typically drawn at physician
offices, clinics, hospitals or blood draw stations, where trained personnel are
available, and then sent to a laboratory for HIV testing. Blood samples and
related blood-sampling equipment require careful handling if healthcare
personnel are to avoid accidental exposure to blood-borne pathogens, including
HIV. In addition, the use of blood-based tests has become increasingly costly
because of the costs of disposing of potentially infected specimens, syringes,
needles and transfer tubes. The overall cost of blood-based testing has
precluded large public health screening programs, particularly in less developed
countries, many of which have significantly higher rates of HIV infection than
that of the U.S. Even in the United States, certain populations are not
routinely screened due to the high cost of blood-based testing.
In December 1994, the FDA approved the first non-invasive method for HIV-1
testing, an oral fluid-based screening test and collection device. Collection of
oral fluid is technique dependent, and detailed instructions on the proper use
of the oral fluid collection device need to be carefully followed. In addition,
oral fluid is not commonly collected and is rarely tested for other diagnostic
purposes. In June 1996, one manufacturer received approval from the FDA for a
Western Blot oral-fluid supplemental test.
HIV screening can also be performed by using a dried blood spot ("DBS")
specimen. DBS sampling, which was developed in the late 1980's, is a variant of
blood sampling initially designed for the testing of newborns. The DBS sampling
method involves sticking a baby's heel or an adult's finger with a sharp lancet
and collecting five or six drops of blood onto filter paper. The laboratory
punches the dried blood spots out
4
of the filter paper, and the non-cellular components of the blood spot are
eluted back in liquid form by soaking the punches in diluent. The resulting
fluid is then assayed by one of several traditional serum/plasma enzyme
immunoassays licensed for use with DBS.
The DBS method, which is comparable in cost to traditional serum tests, is
susceptible to problems in sample variability, the adequacy of volume for
testing, pain on blood sampling and invasiveness.
The human immune system typically requires a number of weeks or months to
begin producing antibodies following exposure to HIV. There is no consensus in
the scientific community as to whether antibodies can first be detected in
blood, urine or oral fluid.
THE CALYPTE URINE-BASED HIV-1 SCREENING AND SUPPLEMENTAL TESTS
Calypte's proprietary urine-based HIV-1 screening test is non-invasive, easy
to use, reliable and avoids many of the costs and risks associated with
blood-based testing. The Company's screening test, when used with the Western
Blot supplemental test for urine provides the only complete urine-based HIV
testing method. Laboratories using the Company's method can complete the entire
testing profile for HIV-1 antibody using a single urine specimen. The Company
believes that the benefits of its testing method will enable it to penetrate
existing markets and expand into new markets that are not served currently by
the more expensive blood and oral fluid-based HIV test systems. Key benefits of
the Company's test include:
EASE OF USE/NON-INVASIVE COLLECTION. Urine is the most commonly collected
bodily fluid for laboratory testing as it is already being collected for testing
purposes other than the detection of HIV antibody. Collection of the urine can
take place any time of day, and the test does not require a 24-hour voided
specimen or a midstream, clean-catch sample. Because it requires no special
preservatives or containers, it is also easier to collect, handle, and discard
than blood. Furthermore, the Company's test is in standard EIA format and is
designed to be used with standard laboratory equipment. Blood sampling is
invasive and, for many patients, stressful and painful. The ability to screen
non-invasively for HIV in all types of patients, including injection drug users
and newborns, will enhance patient comfort and may significantly increase the
voluntary testing rates in patients who might otherwise decline testing.
Moreover, unlike urine collection, obtaining an oral fluid specimen is highly
technique-dependent, requiring specific placement of a sterile collection device
in the mouth, rubbing the collection device along the gum line, and holding it
in place for no less than two and no more than five minutes. Unlike oral fluid,
the collection of urine does not require specially trained personnel, nor is its
collection restricted to patients of certain ages.
LOWER OVERALL COST. The Company's urine-based screening test may lower
significantly the overall cost of testing for HIV infection because the cost of
collecting, transporting, testing and disposing of urine specimens can be
significantly less than that of blood specimens, and less than the cost of an
oral fluid screening test. Additional cost savings may accrue as a function of
reduced needlestick incidents and their associated counseling, testing and lost
productivity. With respect to oral fluid screening tests, the Company believes
that each oral fluid collection device costs between $2.00 to $4.00, while a
urine collection cup costs approximately $0.20. Moreover, since urine is often
already being collected for other testing purposes, the incremental cost of
collecting urine samples is likely to be lower than collecting oral fluids.
Nonetheless, the total cost of deploying urine, blood or oral-based HIV
screening tests or a combination thereof will vary according to the testing
purpose and protocol and whether other diagnostic tests are performed
simultaneously. The ancillary costs (such as collection method, accidental
exposure to HIV and sample disposal) associated with blood testing are more
expensive than urine testing.
SAFETY. Independent studies have concluded that the likelihood of finding
infectious HIV virus in urine is extremely low. There have been no reported
cases of transmission of HIV virus through contact with urine of HIV-infected
patients. Accordingly, the risk of HIV infection to health care and laboratory
workers accidentally exposed to urine samples is negligible. Since no needles
are used in the Calypte urine sampling process, the test eliminates this route
of accidental infection. In developing countries, where the
5
supply of sterile needles and syringes cannot be guaranteed, the safety benefits
of using urine sampling extend to patients as well as to health care workers.
RELIABILITY. The Company has performed clinical studies demonstrating the
effectiveness of using urine as a reliable and clinically valid sample for HIV
testing. In Company-funded clinical trials conducted by or on behalf of the
Company, for the HIV-1 urine EIA and the urine Western Blot supplemental test,
more than 11,000 paired blood and urine specimens were tested. Two measures of
the reliability of our urine-based HIV test were employed--specificity and
sensitivity. Specificity is the ability of an assay or method to identify all
non-HIV infected individuals correctly. Sensitivity is the ability of the assay
or method to detect truly HIV-infected individuals. In recent studies where
specificity was assessed by testing specimens from a combined subset of low risk
subjects, the resulting specificity was 100% for the screening test in
conjunction with the supplemental test. Sensitivity (correlation to blood tests)
of the urine testing method was estimated by testing samples from a subset of
individuals known to be infected with HIV-1, including those with a clinical
diagnosis of AIDS. The sensitivity in that subset was measured at 99.7%.
In spite of the benefits of the Company's urine-based screening and
supplemental tests, such tests represent a new method of determining the
presence of HIV antibodies. Blood-based and oral fluid based tests, which
constitute competitive products, have the advantage of already being
commercially marketed and have gained acceptance from the medical community.
Furthermore, both blood-based and oral fluid based tests have been shown to be
reliable media for detection of HIV. There can be no assurance that the
Company's urine-based screening test will gain any significant degree of market
acceptance among physicians, patients or health care payors, even if the
necessary regulatory and reimbursement approvals are obtained.
TEST METHODOLOGY. The Company's urine-based screening test uses an
industry-standard 96 well microtiter plate to detect antibodies to HIV-1 in
urine. The HIV-1 antibodies, when present in urine, bind to Calypte's
proprietary antigen coated on prepared microtiter plates. A subsequent enzymatic
reaction produces a color change revealing the presence of HIV-1 antibodies.
The screening test requires only 200 microliters of urine (approximately
four drops) and can be performed using standard laboratory equipment. Samples
can be shipped and stored at two to 30 degrees centigrade for up to 55 days
before testing. The laboratory protocol for testing urine is nearly identical to
that of blood, and therefore requires few, if any, modifications to existing
laboratory protocols.
The Company's urine-based supplemental test uses the same commercially
available Western Blot kit components as provided for the blood-based Cambridge
Biotech supplemental test. This urine-based supplemental test requires 1.0
milliliter of urine added directly to the standard kit diluent and is performed
with additional times of incubation for the two detection steps as the only
changes in procedure. The same laboratory equipment is used for both the blood
and urine supplemental tests.
The Cambridge HIV-1 Western Blot kit for use with urine is dedicated to
urine testing by virtue of the urine Western Blot controls included with the
Western Blot blood kit and a different blot interpretation criterion. For urine,
blots showing the presence of a single band, gp160, equal to or greater
intensity than the low positive urine Western Blot control are interpreted as a
positive HIV-1 result. Urine blots have a lower indeterminate rate than blood,
allowing more definitive negative or positive results.
In December 1998, Calypte acquired from Cambridge Biotech certain assets
relating to the Western Blot product line for certain infectious diseases. The
acquisition included Cambridge Biotech's urine-based and serum-based HIV-1
Western Blot products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
THE CAMBRIDGE BIOTECH BLOOD-BASED HIV-1 SUPPLEMENTAL TEST
As the first of the four supplemental blot tests for blood HIV-1 antibodies
to be FDA-licensed, the Cambridge Biotech HIV-1 Western Blot kit has been in
commercial distribution for more than 8 years. Since the FDA's November 1999
approval of a "Day Assay" format, the supplemental test is available in both a
five-hour and an overnight format.
6
THE SENTINEL TESTING SERVICE
In January 2000, the Company announced its participation in a new national
urine-based testing service for HIV-1 antibody, chlamydia, and gonorrhea. The
new service, called Sentinel, is a collaboration between the Company, Wampole
Laboratories, a division of Carter-Wallace, Inc. and Clinical Reference
Laboratory. The service is a painless, non-invasive, urine-based sampling method
designed to identify HIV-1 antibody, and the chlamydia and gonorrhea sexually
transmitted diseases ("STDs"). The Sentinel service provides a three-day
response and is priced below the Medicaid reimbursement level in most states.
The service will be targeted to medical clinics and physicians and is expected
to begin in the second quarter of 2000. The Company manufactures the HIV-1
antibody tests used in the Sentinel service. The Company and Wampole
Laboratories will jointly market the testing service. Clinical Reference
Laboratory will perform the laboratory analysis for the testing service.
PRODUCTS UNDER DEVELOPMENT
The Company's research and development efforts are directed toward process
improvements and the development of select high-priority new diagnostic
products. Priority is determined on the basis of feasibility, probable cost to
develop, regulatory complexity, market size and competition.
RAPID TEST. The Company has been investigating the feasibility of a rapid
test in response to the reports by the Center for Disease Control and Prevention
(CDC) on the value of immediate HIV antibody test results. The high number of
individuals who do not return for test results and counseling constitutes a
threat to the public health. In addition, in emergency rooms, delivery rooms and
other settings, there is an urgent need to know the HIV status of the patient.
Since AZT treatment of pregnant mothers, even at delivery and for the newborn,
has been shown to result in a substantial decrease in HIV transmission, there
appears to be a new market for the reliable rapid test format. The development
of the rapid test remains at an early stage. At this time, the Company believes
it would be premature to issue predictions as to the product's reliability and
cost or the likelihood of success and timing of product development.
OTHER DIAGNOSTICS. The Company intends to develop additional or improved
urine and blood-based tests for other infectious and viral diseases. The Company
is focusing development on products which are complementary to its existing
product line and market opportunities. These may include development of
urine-based tests for assessment of liver and cardiac risk to be used in the
insurance underwriting industry and a supplemental test for HTLV.
OTC. The Company will continue to explore the potential for an
over-the-counter in-home urine collection kit for use in HIV diagnosis. However,
due to regulatory approval uncertainties and cost concerns, this is not a
high-priority development for the Company.
RESEARCH AND DEVELOPMENT SPENDING. The Company has invested the funds in
research and development that it believes to be necessary and appropriate to
bring its innovative HIV-1 urine-based screening test to the market. The Company
spent $4.1 million, $3.9 million, and $3.7 million on product research and
development in 1999, 1998, and 1997, respectively. Future spending will be
devoted to product and process improvements and new product development and the
level of spending will, accordingly, vary from past spending levels.
SALES, MARKETING AND DISTRIBUTION
The Company's marketing strategy is to use distributors, focused direct
selling, telemarketers, and direct mail to penetrate certain targeted domestic
markets. The Company maintains a small direct sales force to sell the Company's
HIV-1 screening test and potential future products to laboratories serving the
life insurance market. International and other U.S. markets will be addressed
utilizing diagnostic product distributors. In late summer of 1998, the Company
began selling its combined urine-based HIV-1 test with the Western Blot
supplemental test in the U.S. To date, the Company has received approval for the
sale of
7
its product outside of the U.S. only in Indonesia. Several international
approvals are pending, and the Company is working collaboratively with its
distributors to obtain regulatory approval to market and promote the products in
their local markets.
The Company anticipates that a portion of its revenues for the next several
years will be derived from international distributor sales. International sales
and operations involve a number of inherent risks and may be limited or
disrupted by the imposition of government controls, export license requirements,
political instability, trade restrictions, changes in tariffs, difficulties in
managing international operations and fluctuations in foreign currency exchange
rates. Certain of the Company's distributors have limited international
marketing experience, and there can be no assurance that the Company's
distributors will be able to market successfully the Company's products in any
international market.
The following table summarizes the markets and geographic regions covered by
the Company and its distributors for its HIV-1 test.
COMPANY GEOGRAPHIC REGION MARKETS
- ------- ----------------------------- -----------------------------
Calypte...................... United States Laboratories serving the life
insurance testing market.
Calypte...................... Canada All
Wampole Laboratories......... United States All but the above
laboratories.
Otsuka....................... Japan All
Teva Medical Ltd............. Israel All
Pacific Business
Development, Inc........... South Korea All
Chemitech International
Company.................... Egypt, Oman, Yemen, Kuwait, All
Jordan, Lebanon, United
Arab Emirates
Professional Biotech Pvt.
Ltd........................ India All
POS Biological Espana,
S.L........................ Spain and Portugal All
Uni-Health Services Sdn.
Bhd........................ Malaysia All
WAMPOLE LABORATORIES. In September 1999, the Company appointed Wampole as
its exclusive U.S. distributor to the hospital, public health, and reference lab
markets. The agreement has an initial five-year term and on-going exclusivity
within this term is predicated on the purchase of minimum volumes of the
Company's product.
OTSUKA PHARMACEUTICAL CO., LTD. Otsuka is a Japanese integrated health care
and consumer products conglomerate. In an agreement first created in
August 1994, and amended in December 1998, the Company appointed Otsuka as its
exclusive distributor for all market segments in Japan. The agreement extends
through 2004 and is terminable without cause by Otsuka upon 120 days notice.
TEVA MEDICAL LTD. (FORMERLY TRAVENOL LABORATORIES (ISRAEL) LTD.). In
December 1994 the Company entered into an agreement with TEVA Medical Ltd.
("TEVA"), which gives TEVA exclusive rights to distribute the HIV-1 test and to
use the trademark "Calypte" within Israel. Under the agreement, TEVA will
undertake registration of the product in Israel with the Company paying
regulatory fees. The agreement has no fixed term and requires no minimum
purchase levels.
PACIFIC BUSINESS DEVELOPMENT, INC. The Company appointed Pacific Business
Development ("Pacific") as its exclusive distributor for all market segments in
South Korea in July 1999. Pacific's business partner in Korea is Baecam Medical
Co. Ltd. This agreement has an initial three-year term. Continuing exclusivity
during the term of the agreement is predicated on the purchase of minimum
volumes of product following the product's successful registration in South
Korea.
8
CHEMITECH INTERNATIONAL COMPANY. The Company appointed Chemitech
International Company as its exclusive distributor for all market segments in
seven Middle Eastern countries in March 1999. The agreement is extendable
year-by-year and on-going exclusivity is predicated upon specified minimum
purchases following successful local registration of the product.
PROFESSIONAL BIOTECH PVT. LTD. In March 1999, the Company appointed
Professional Biotech Pvt. Ltd. as its exclusive distributor for all market
segments in India. The agreement's initial term is eighteen months, extendable
thereafter. Extension of the agreement and on-going exclusivity are negotiable
following successful local registration of the product.
POS BIOLOGICAL ESPANA, S.L. The Company appointed POS Biological Espana,
S.L. as its exclusive distributor for all market segments in Spain and Portugal
in October 1999. This agreement has an initial term of three years. Continuing
exclusivity during the term of the agreement is contingent upon specified
minimum purchases following successful local product registration.
UNI-HEALTH SERVICES SDN. BHD. In October 1999, the Company appointed
Uni-Health Services Sdn. Bhd. as its exclusive distributor for all market
segments in Malaysia. The distribution agreement has an initial term of one
year. Extension of the agreement and continuing exclusivity are dependent upon
the purchase of specified minimum volumes of product following the product's
successful local registration.
The Company's products represent an alternative to the blood-based method of
determining the presence of HIV antibodies and there can be no assurance that
these products will gain any significant degree of market acceptance among
physicians, patients or health care payors, even if necessary international and
U.S. regulatory and reimbursement approvals are obtained. The Company believes
that recommendations and endorsements by the medical community will be essential
for market acceptance of the products, and there can be no assurance that any
such recommendations or endorsements will be obtained. The Company has little
experience marketing and selling its products either directly or through its
distributors. The Company's marketing strategy relies upon its alliance with
third-party distributors for the success of its products. There can be no
assurance that the Company's direct sales force will be effective, that its
distributors will market successfully the Company's products or that, if such
relationships are terminated, the Company will be able to establish
relationships with other distributors on satisfactory terms, if at all. Any
disruption in the Company's distribution, sales or marketing network, or failure
of the Company's products to achieve market acceptance, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In 1999, the Company's revenue from product sales totaled $3.7 million. Over
96% of Calypte's 1999 product sales revenues arose from sales to customers in
the United States. Consistent with its policy of maintaining inventory levels
that are adequate to minimize the lead time required to fulfill customer orders,
the Company had no backlog of unfilled orders at either December 31, 1999 or
1998.
The Company is currently negotiating with other potential distributors of
its HIV product line in various countries, including China, Brazil, and South
Africa. In March 1999, the Chinese National Center for AIDS Prevention and
Control (NCAIDS) and the Chinese Academy of Preventive Medicine (CAPM) signed a
letter agreement with Calypte to use Calypte's urine HIV-1 test in various HIV
screening applications including: STD clinics, military personnel, pregnant
women, children, marriage license applications and insurance applications. The
Company continues to pursue a definitive distribution agreement for its products
in China.
MANUFACTURING
The manufacture of the Company's urine-based HIV test involves antigen
production, plate processing and preparation of certain washes and other
reagents. All processes are carried out under FDA Good Manufacturing Practices
("GMP"). Antigen production involves cell culture, antigen expression and
purification. Following purification, the antigen is tested extensively and
optimized for plate coating. The
9
coating of standard 96 well microtiter plates with antigen is completed using
standard plate coating equipment. Following binding of the antigen to the
plates, the plates are blocked and stabilized to prevent nonspecific binding of
the antigen. The plates are then dried and packaged in foil pouches. The washes
and reagents are produced using standard solution preparation techniques.
Calypte's manufacturing operations for its HIV-1 screening test are located
in Berkeley, California with an estimated annual capacity of approximately 4.5
million tests. The Company received an establishment license from the FDA for
the production of its HIV-1 screening test at this facility on August 6, 1996.
The Company has completed a larger manufacturing facility in Alameda, California
for which FDA approval is pending. The capacity of the Alameda facility is
approximately 20 million tests per year. In February 2000, the Company filed a
new license application for the Alameda facility. The Company intends to
continue manufacturing in its Berkeley facility until the FDA approves the
license for its Alameda facility.
In December 1998, the Company acquired certain assets of Cambridge Biotech
Corporation, including the manufacturing facilities for its HIV-1 product line
in Rockville, Maryland. The Rockville facility also has an establishment license
from the FDA for the urine and blood-based Western Blots.
In November 1998, the Company received a Warning Letter from the FDA
following an inspection by the FDA of the Company's manufacturing facilities in
Berkeley and Alameda, California. On December 11, 1998, the Company responded in
writing to each of the deficiencies cited in the Warning Letter. The Company
subsequently received another letter from the FDA requesting further responses
regarding certain of the deficiencies. The Company responded to the subsequent
letter on June 1, 1999. The FDA conducted a follow-up inspection of the Berkeley
and Alameda facilities on September 28 through October 7, 1999, which resulted
in observations requiring corrective action or response from the Company. The
Company submitted its written responses to the FDA's inspection observations on
November 4, 1999. On March 21, 2000, the Company received a response from the
FDA requesting additional information. The Company is preparing its response to
this request.
In May 1999, the Company received a Warning Letter from the FDA following an
inspection by the FDA of its manufacturing plant in Rockville, Maryland. The
Warning Letter was based upon an inspection of the Rockville manufacturing
facility that was conducted between November 20 and December 11, 1998, which
cited a number of significant observations. On May 24, 1999, the Company
responded in writing to each of the deficiencies cited in the Warning Letter. On
November 19, 1999, the Company received a letter from the FDA stating that the
Company's responses were considered adequate, and the Warning Letter was
formally closed. Between November 30, and December 9, 1999, the FDA conducted a
follow-up inspection of the Rockville facility that resulted in observations
requiring corrective actions or response from the Company. On January 7, 2000,
the Company responded in writing to each of the FDA observations and is awaiting
the FDA's reply. On March 21, 2000, the Company received a response from the FDA
requesting additional information. The Company is preparing its response to this
request.
If the FDA is not satisfied with the Company's responses and corrective
actions regarding these matters at either its Alameda or Rockville facilities,
the FDA could take regulatory actions against the Company, including license
suspension, revocation, and/or denial, seizure of products and/or injunction,
and/or civil penalties or criminal sanctions. Any such FDA action is likely to
have a material adverse effect upon the Company's ability to conduct operations.
In addition, failure of the Company to satisfy the FDA on these matters may
adversely affect receiving approval for the Alameda facility and/or the
Company's ability to export its products to certain international markets.
Calypte purchases raw materials and uses components in the manufacture of
its products that it obtains from various suppliers and relies on single sources
for a few of these components. Establishment of additional or replacement
suppliers for these components cannot be accomplished quickly. The Company uses
some single-source components, and any delay or interruption in supply of these
components could
10
significantly impair the Company's ability to manufacture products in sufficient
quantities, particularly as Calypte increases manufacturing activities in
support of commercial sales.
The Company has limited experience in the commercial-scale manufacture of
its products. The Company currently manufactures its products for sale, for
submission to FDA for ongoing compliance, for clinical trials, and for building
its inventory. Calypte may encounter difficulties in scaling-up production of
its products, including problems involving production yields, quality control
and assurance, raw material supply and shortages of qualified personnel. Due to
Calypte's limited manufacturing experience, its estimates with regard to these
and other operational requirements may be incomplete or inaccurate and
unanticipated events and circumstances are likely to occur. The larger Alameda
facility will be needed if and when demand for the screening test exceeds the
more limited capacity of the Berkeley facility. Difficulties encountered by the
Company in manufacturing scale-up to meet demand, including delays in receiving
FDA approval for the Alameda facility, could have a material adverse effect on
its business, financial condition and results of operations.
Due to the nature of its manufacturing processes, the Company is subject to
stringent federal, state and local laws, rules, regulations and policies
governing the use, generation, manufacture, storage, air emission, discharge,
handling and disposal of certain materials and wastes. There can be no assurance
that the Company will not be required to incur significant costs to comply with
land use and environmental regulations as manufacturing is scaled-up to
commercial levels, nor that the operations, business or financial condition of
the Company will not be materially and adversely affected by current or future
environmental laws, rules, regulations and policies. There can be no assurance
that the Company will be able to obtain and maintain all required permits in
connection with the operation of its manufacturing facilities. When the Company
begins to produce products on a larger commercial scale, it will be a
significant user and disposer of water. The disposal of water used in the
Company's manufacturing processes must comply with applicable federal, state and
local environmental protection laws, and compliance with these laws may be
costly and difficult.
The manufacturing facility in Maryland is a specialized facility
incorporating Biosafety Level 3 controls for the manipulation of potentially
infectious biological agents (HIV and HTLV viruses) as well as the use of
hazardous chemical materials. As such, this facility and the products
manufactured there are subject to rigorous Federal, State and local regulatory
controls including registration, licensing and specific material use permits.
Should it become necessary at some future point to move the Maryland operations
to a different location, significant costs, time and resources would likely be
required to validate such a transfer and obtain the required regulatory
clearances.
TECHNOLOGY
The Company's HIV-1 urine-based test is based on the finding of scientists
at the New York University Medical Center in 1988 that antibodies to HIV-1 could
be found in urine. Prior to this discovery, it was commonly held that antibodies
to systemic infections could not pass through the kidneys, and thus, could not
be found in the urine of infected individuals. The researchers showed that HIV-1
envelope antibodies were present in all urine samples from HIV-1 seropositive
subjects. Building on this discovery, the Company developed an HIV-1 urine
enzyme immunoassay ("EIA") to detect antibodies to HIV-1 in urine. There are two
proprietary features of the Company's HIV-1 urine-based EIA that result in a
format sensitive enough to detect the low levels of HIV antibodies in urine: the
antigen target and the sample buffer in the assay.
Recognizing the prominence of envelope antibodies in urine, the antigen
target in the assay is a full length, recombinant glycosylated HIV-1 envelope
protein, rgp160. Although this antigen is a recombinant glycoprotein, it is
identical to the viral envelope protein gp160 in amino acid sequence and in the
presence of carbohydrate at glycosylation sites. This kind of antigen target can
efficiently capture the full range of HIV-1 envelope specific antibodies
produced in the human polyclonal response to the virus. The microwell
11
assay format permits the high availability of epitopes of the recombinant
envelope glycoprotein for antibody binding. This availability of epitopes
results in the sensitivity verified in clinical trials.
The Company has non-exclusive rights to the proprietary process used to
express the recombinant HIV-1 envelope glycoprotein from Texas A&M University.
This proprietary process for manufacture of rgp160 begins with the baculovirus
expression vector system established in an insect cell culture. The consistent
and high levels of rgp160 expression in baculovirus infected insect cell culture
is a critical step in the overall manufacturing of rgp160. The Company improved
and upgraded the Repligen Corporation ("Repligen") process with a proprietary
process which uses a system in which the HIV-1 envelope protein is produced in
the insect cell membrane rather than typical tissue culture systems where the
protein is secreted into insect cell culture media. Rgp160 is an insoluble
protein and requires detergent based extraction and purification procedures
which are proprietary.
The Company developed and has obtained a U.S. patent claiming a sample
buffer formulation, which is used in the HIV-1 urine test. This sample buffer
acts as a diluent for urine in the assay procedure and significantly increases
test specificity by reducing non-specific binding of immunoglobulins
(non-specific antibodies) and other substances in urine that would decrease
specificity and sensitivity of HIV-1 antibody binding. Sample buffer is
manufactured in the Company's Berkeley, California facility.
The Company's products incorporate established immunoassay technology based
on antibody-antigen reactions. Antibodies are immune system proteins produced as
a result of an organism's immune response to substances (antigens) foreign to
the body and specifically bind to antigens and signal the immune system to
assist in eliminating them. Immunoassays are used for diagnostic applications
where the presence or absence of a specific analyte is being evaluated and allow
the detection of some analytes at levels as low as one part per billion.
Antigens include viruses, bacteria, parasites, chemical toxins and other foreign
substances and hormones.
The HIV-1 urine assay format includes a standard 96 well microtiter plate
which is compatible with standard laboratory instrumentation. The microwell
plates are coated with proprietary recombinant HIV-1 envelope protein antigen.
Patient urine and the unique specimen diluent are introduced to the microwell
simultaneously. If HIV-1 antibodies are present, they bind to the antigen coated
well and remain during the subsequent wash steps. An enzyme labeled conjugate is
added to the well. This conjugate binds specifically to human antibody which
remains from the previous step. Following another wash, substrate reagent is
added and color development occurs due to the presence of the enzyme conjugate
in the well. This color is measured spectrophotometrically on a standard
laboratory microwell plate reader. The presence of HIV antibody in the specimen
is indicated by the development of color in the microwell, and the intensity of
the color is proportional to the amount of antibody.
The Company's HIV-1 urine-based supplemental test uses the Cambridge Biotech
HIV-1 Western Blot kit with a procedure developed by Calypte for testing urine
specimens. The Cambridge Biotech HIV-1 Western Blot kit is based on the
combination of electrophoretic separation of complex mixtures of proteins with
the highly sensitive immunoblotting technique. This method has been highly
useful in characterizing the antigenic profile of HIV-1 and describing the
immune response to HIV-1 in exposed or infected persons.
The Cambridge Biotech HIV-1 Western Blot kit is used for testing both blood
and urine specimens. The manufacture of the kit involves the production of an
inactivated, partially purified HIV-1 lysate from HIV-1 propagated in an
H9/HTLV-III(b) T-lymphcyte cell line. HIV-1 proteins are separated by molecular
size using gel electrophoresis of the lysate in the presence of detergent
(sodium dodecylsulfate). These separated HIV-1 proteins are electrotransferred
from gel to a nitrocellulose membrane which is washed, blocked to minimize non-
specific immunoglobulin binding and packaged. The kit provides serum controls
and components which enable the detection and visualization of HIV-1 antibodies
present in the specimen incubated with individual nitrocellulose membrane
strips. Bands corresponding to specific location of HIV-1 proteins are used to
interpret a positive, negative or indeterminate result.
12
INVESTMENT IN PEPGEN
In October 1995 Calypte purchased an equity interest in Pepgen Corporation
("Pepgen"), a development-stage therapeutic research and drug development
company with two lead compounds. The first compound is an interferon product,
called interferon-tau, which early animal trials have shown to be promising both
as an anti-viral and anti-tumor agent with less toxicity than other interferons.
In February 1999, Pepgen received clearance from the FDA to commence Phase I
human clinical trials of interferon-tau for patients who have multiple
sclerosis. Pepgen's second lead compound is hybrid interferon alpha. Preliminary
studies indicate that hybrid interferon alpha shows lower levels of toxicity
than currently available alpha interferons while retaining the anti-viral and
anti-tumor activity of alpha interferon. Pepgen expects to conduct additional IN
VITRO and IN VIVO preclinical studies on hybrid interferon alpha and, if such
studies are successful, Pepgen plans to submit an investigational new drug
application (IND) to the FDA.
The Company purchased its equity position in Pepgen for $2.5 million,
comprised of $1.0 million paid at closing, $1.0 million payable to Pepgen
pursuant to a promissory note and options to purchase the Company's Common Stock
valued at $500,000. The $1.0 million promissory note balance was paid in
October 1996. The options were granted to Pepgen shareholders for the purchase
of an aggregate of 475,000 shares of the Company's Common Stock at a price of
$7.50 per share, of which 100,000 shares were immediately exercisable and the
remaining 375,000 shares are exercisable upon attainment of certain milestones.
The options expire at the earlier of September 2005 or three years after
becoming exercisable. In addition, Calypte is entitled to elect one of the five
Board members of Pepgen.
During 1998, the Company loaned Pepgen a total of $768,000 at an effective
interest rate of 10%. During the first quarter of 1999, the Company loaned
Pepgen an additional $64,000 at an interest rate of 10%. The notes receivable
from Pepgen were secured by all of Pepgen's intellectual property, as well as by
a personal guaranty from Pepgen's Founder and Chairman and a standby guaranty
from Pepgen's President. The entire loan plus interest was due July 1, 1999.
In May 1999, Pepgen received a financing offer from a third party that was
contingent upon Calypte converting its note receivable due from Pepgen into an
additional equity interest in Pepgen. At a meeting of the Calypte Board of
Directors, the Board agreed to the conversion. Consequently, effective
March 31, 1999, the Company wrote off its total investment in the note
receivable from Pepgen, including accrued interest, as research and development
costs. Additional amounts totaling $63,000 were spent on research and
development related to Pepgen during the second quarter of 1999. On October 6,
1999, Pepgen secured $3.8 million in a new round of financing. Calypte currently
owns 38% of Pepgen. See Item 13, "Certain Relationships and Related
Transactions."
PATENTS, PROPRIETARY RIGHTS AND LICENSES
The Company believes that its future success will depend in large part on
its ability to protect its patents and proprietary rights. Accordingly, the
Company's ability to compete effectively will depend in part on its ability to
develop and maintain proprietary aspects of its technology. The Company has two
U.S. patents, one pending U.S. patent application, six foreign patents, and
eight pending foreign patent applications. In addition, the Company currently
has the right to utilize certain patents and proprietary rights under licensing
agreements with New York University ("NYU"), Cambridge Biotech Corporation,
Repligen, and Texas A&M University System. These license arrangements secure
intellectual property rights for the manufacture and sale of the Company's
products.
The Company has licensed from NYU, on an exclusive basis, a U.S. patent for
the detection of antibodies to HIV in urine. The rights under the license extend
until the expiration of the U.S. patent in 2009 provided the Company makes
certain payments. The Company has the right to make, use, sell and sublicense
products utilizing the technology described in the patent and is obligated to
make certain fixed and royalty payments to NYU to maintain exclusivity of the
license. In connection with the NYU license,
13
the Company also funded research at NYU through 1999. The Company has exclusive
worldwide license to NYU inventions that arise from the research funded by the
Company.
The Company has sublicensed from Cambridge Biotech Corporation proprietary
technology related to the HIV envelope glycoprotein. The sublicense grants to
the Company a non-exclusive worldwide sublicense to make, have made, use and
sell products that relate to the licensed technology. The Company is required to
pay Cambridge Biotech Corporation royalties on products incorporating the
licensed technology. The license extends until the expiration of the licensed
patents in 2005, although the Company can terminate the agreement at any time
upon 30 day's written notice.
The Company has been granted a non-exclusive license from Texas A&M
University to make, have made, use and sell products based on its proprietary
recombinant expression systems. The Company is required to pay certain fixed and
royalty payments to Texas A&M University on net sales varying with the content
of Texas A&M's technology in the Company's products.
The Company licensed from Repligen HIV-1 gp160 recombinant virus seed stock.
The Company has been granted (i) an exclusive license to make, have made, use
and sell products incorporating this material for diagnostic purposes, and
(ii) non-exclusive license to make, have made, use and sell the gp160 seed stock
for research purposes. For seven years beginning on the date the Company first
realizes net sales from products incorporating gp160, the Company must pay to
Repligen certain royalties on net sales derived from such products and certain
royalties on net sublicensing revenue derived from sales of products
incorporating gp160.
In the event that the Company does not develop alternate sources of
revenues, its obligation to make minimum royalty payments under licenses
requiring such payments could have a material adverse impact on the Company's
results of operations. Failure to make required minimum royalty payments may
also result in the loss by the Company of exclusivity under, or termination of,
such certain licenses.
The HIV testing industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. Litigation or
interference proceedings could result in significant diversion of efforts by the
Company's management and technical personnel. There are a number of filed and
issued patents involved with the detection of HIV antibodies. One such patent is
currently owned by Chiron Corporation. While the Company, based on the opinion
of its patent counsel, believes that its urine-based HIV-1 screening test does
not infringe the Chiron patent, there can be no assurances that Chiron will not
assert such claims against the Company. Patent litigation can be costly and
protracted. The expense of litigating a claim against the Company for patent
infringement could have a material adverse effect on the Company's business,
financial condition and results of operations. In the event that the Company was
found to be infringing a validly issued patent, and the Company could not obtain
a license to such patent on reasonable terms, the Company could be forced to pay
damages, obtain a license to such patent at a significantly higher rate or,
possibly, remove its urine-based HIV-1 screening test from the market. Such an
event would have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, do not have, or will not seek to apply for and obtain, patents
that will prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the U.S. or in international markets. There can be
no assurance that the Company will not be required to obtain additional cross
licenses in the future or that the Company will not in the future become subject
to patent infringement claims and litigation or interference proceedings
declared by the U.S. Patent and Trademark Office ("USPTO") to determine the
priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time consuming. Litigation may be necessary to
enforce patents issued to or licensed by the Company, to protect trade secrets
or know-how owned by the Company or to determine the enforceability, scope and
validity of the proprietary rights of others.
14
Although patent and intellectual property disputes in the medical diagnostic
area have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, there can be no assurance that necessary licenses would
be available to the Company on satisfactory terms if at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its
products, which would have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to maintain exclusivity under or maintain its current
license agreements. Termination of any of these licenses could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company relies on trade secrets and proprietary know-how, which it seeks
to protect, in part, through appropriate confidentiality and proprietary
information agreements. These agreements generally provide that all confidential
information developed or made known to the individual by the Company during the
course of the individual's relationship with the Company is to be kept
confidential and not disclosed to third parties, except in specific
circumstances. The agreements generally provide that all inventions conceived by
the individual in the course of rendering services to the Company shall be the
exclusive property of the Company; however, certain of the Company's agreements
with consultants, who typically are employed on a full-time basis by academic
institutions or hospitals, do not contain assignment of invention provisions.
There can be no assurance that proprietary information or confidentiality
agreements with employees, consultants and others will not be breached, that the
Company would have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known to or independently developed by
competitors.
GOVERNMENT REGULATION
OVERVIEW
The Company's products are subject to extensive regulation by the FDA and,
to varying degrees, by state and foreign regulatory agencies. The Company's
products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act
(the "Act"), as amended by the Medical Device Amendments of 1976, the Safe
Medical Devices Act of 1990, and the Modernization Act of 1997 among other laws.
Under the Act, the FDA regulates the preclinical and clinical testing,
manufacturing, labeling, distribution, sale and promotion of medical devices in
the U.S. The FDA prohibits a device, whether or not cleared under a 510(k)
premarket notification, or approved under a PMA or a product license application
("PLA"), from being marketed for unapproved uses. If the FDA believes that a
company is not in compliance with the regulations, it can institute proceedings
to detain or seize a product, issue a recall, prohibit marketing and sales of
the company's products and assess civil and criminal penalties against the
company, its officers or its employees. Furthermore, the Company plans to sell
products in certain foreign countries which impose local regulatory
requirements. The preparation of required applications and subsequent FDA and
foreign regulatory approval process is expensive, lengthy and uncertain. Failure
to comply with FDA and foreign regulatory requirements could result in civil
monetary penalties or criminal sanctions, restrictions on or injunctions against
marketing of the Company's products. Additional enforcement actions may
potentially include seizure or recall of the Company's products, and other
regulatory action. There can be no assurance that the Company will be able to
obtain necessary regulatory approvals or clearances in a timely manner or at
all, and delays in receipt of or failure to receive such approvals or
clearances, the loss of previously received approvals or clearances, or failure
to comply with existing or future regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.
15
HIV-1 SCREENING AND SUPPLEMENTAL TESTS
The Company's HIV-1 screening and supplemental tests is regulated by the FDA
Center for Biologics Evaluation and Research. When the test was submitted to the
FDA in September 1992, the FDA required a PLA and an establishment licensing
application ("ELA") for the Company's Berkeley, California manufacturing
facility. In August 1996, the Company received a product license and an
establishment license from the FDA to manufacture and sell, in interstate and
foreign commerce, the Company's urine-based HIV-1 screening test for use in
laboratory settings.
In December 1998, Calypte acquired the assets relating to the Western Blot
product line of Cambridge Biotech Corporation for HIV-1. Both the urine and
serum-based HIV-1 Western Blot products have received a product license and an
establishment license from the FDA. In March 1999, the licenses were transferred
from Cambridge Biotech Corporation to Calypte.
MANUFACTURING FACILITIES
The FDA requires the Company's products to be manufactured in compliance
with GMP regulations. In addition, the Company is subject to certain additional
manufacturing regulations imposed by the State of California and the State of
Maryland for the Rockville facility where the blots are manufactured. These
regulations require that the Company manufacture its products and maintain
related documentation for testing and control activities. The Company's
facilities and manufacturing processes have been periodically inspected by the
State of California and other agencies and remain subject to audit from time to
time. The Company believes that it is in substantial compliance with all
applicable federal and state regulations. Nevertheless, there can be no
assurance its manufacturing facilities will satisfy GMP or California and
Maryland manufacturing requirements. Enforcement of the GMP regulations has
increased significantly in the last several years, and the FDA has publicly
stated that compliance will be more strictly enforced. In the event that the FDA
determines the Company to be out of compliance with its regulations and to the
extent that the Company is unable to convince the FDA of the adequacy of its
compliance, the FDA has the power to assert penalties, including injunctions or
temporary suspension of shipment until compliance is achieved. In addition, the
FDA will not approve an ELA or PMA if the facility is found in noncompliance
with GMPs. Such penalties could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Manufacturing"
section with respect to Warning Letters received by the Company from the FDA in
November, 1998 and May 1999 and observations made in subsequent FDA inspections.
In addition, the manufacture, sale or use of the Company's products are
subject to regulation by other federal entities, such as the Occupational Safety
and Health Agency, the Environmental Protection Agency, and by various state
agencies, including the California Environmental Protection Agency. Federal and
state regulations regarding the manufacture, sale or use of the Company's
products are subject to future change, and these changes could have a material
adverse effect on the Company's business, financial condition and results of
operations.
PRODUCT LIABILITY AND RECALL RISK; LIMITED INSURANCE COVERAGE. The
manufacture and sale of medical diagnostic products subject Calypte to risks of
product liability claims or product recalls, particularly in the event of false
positive or false negative reports. A product recall or a successful product
liability claim or claims that exceed our insurance coverage could have a
material adverse effect on us. We maintain a $10,000,000 claims made policy of
product liability insurance. However, product liability insurance is expensive.
In the future, we may not be able to obtain coverage on acceptable terms, if at
all. Moreover, our insurance coverage may not adequately protect us from
liability that we incur in connection with clinical trials or sales of our
products.
16
INTERNATIONAL
Distribution of the Company's products outside the United States is also
subject to regulatory requirements that vary from country to country. In a
number of foreign countries, FDA approval is required prior to approval in that
country. The export by the Company of certain of its products that have not yet
been approved for domestic commercial distribution may be subject to FDA export
restrictions. To date, in countries operating their own agencies for the
evaluation and registration of HIV testing kits, the Company has received
approval for the sale of its product in Indonesia only. Approval and
registration processes are underway in several other countries. Failure to
obtain additional regulatory approvals or failure to comply with regulatory
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
Competition in the IN VITRO diagnostic market is intense and expected to
increase. Within the United States, the Company will face competition from a
number of well-established manufacturers of blood-based HIV tests, plus at least
one system for the detection of HIV antibodies using oral fluid samples. In
addition, the Company may face intense competition from competitors with
significantly greater financial, marketing and distribution resources than the
Company.
The suppliers of blood-based HIV tests in the United States include Abbott
Laboratories ("Abbott"), Organon-Teknika Corporation ("Organon-Teknika"), Sanofi
Diagnostic Pasteur ("Sanofi"), Ortho Diagnostics ("Ortho") and Bio-Rad
Laboratories. All of these companies have many years of HIV market experience,
and they typically offer a number of different testing products. Abbott, Sanofi
and Ortho currently sell FDA-licensed blood-based HIV-1/HIV-2 combination tests
on the market in the United States, and other companies may be developing
HIV-1/HIV-2 products.
The Company believes that HIV screening tests designed to use oral fluid may
offer significant competition to the Company's urine-based HIV-1 screening test.
The OraSure-TM- collection device manufactured by Epitope, Inc. ("Epitope") used
in conjunction with an HIV-1 EIA manufactured by Organon-Teknika received FDA
approval for marketing in the United States in December 1994. In June 1996,
Epitope received approval from the FDA for a western blot oral-fluid
confirmatory test.
The Company is not aware of any competitors which have submitted urine-based
HIV screening tests to the FDA, but there can be no assurance that such tests
will not be submitted in the future for approval by the FDA. The Company is
aware of only one other manufacturer, Murex Corporation ("Murex"), now owned by
Abbott Laboratories which has publicly announced urine capability for an HIV
test. Murex manufactures a number of HIV assays in microtiter format, none of
which have been submitted to the FDA for review. One such microtiter assay,
"gacelisa," is intended for use on saliva and urine samples but is marketed only
outside of the U.S. primarily as a research assay. Murex markets one HIV product
in the U.S., the FDA-licensed SUDS rapid test, which is intended for use on
serum and plasma only. Although urine capability for this test has been reported
in scientific literature, the Company is not aware of any applications for
expanded sampling claims for this assay. In addition, the SUDS assay format is
not conducive to high-volume testing.
Essentially all of the Company's competitors actively market their
diagnostic products outside of the U.S. In addition, outside of the U.S., where
the regulatory requirements for HIV screening tests are less demanding than
those of the FDA, a much wider range of competitors can be found. Manufacturers
from Japan, Canada, Europe, and Australia offer a number of HIV screening tests
in those markets including HIV-1/HIV-2 tests, rapid tests and other non-EIA
format tests, which are not approved for sale in the U.S. market. There can be
no assurances that the Company's products will compete effectively against these
products in foreign markets, or that these competing products will not achieve
FDA approval.
17
EMPLOYEES
As of December 31, 1999, the Company had 60 full time employees, thirteen of
whom were engaged in or directly supported the Company's research and
development activities, 30 of whom were in manufacturing, facilities and quality
assurance, seven of whom were in marketing and sales and 10 of whom were in
administration. The Company's employees are not represented by a union or
collective bargaining entity. The Company believes its relations with its
employees are good.
William A. Boeger, the Chairman of the Board of Directors of the Company,
also serves as a board member of Pepgen. In addition, Mr. Boeger and Dr. Howard
B. Urnovitz, the Company's Chief Science Officer are both officers of the
Chronic Illness Research Foundation, a non-profit organization. In March 2000,
Mr. Boeger and Dr. Urnovitz announced the formation of a commercial company,
Chronix Biomedical, which will focus on novel ways to detect abberant genes in
individuals with chronic diseases. David E. Collins, Calypte's Chief Executive
Officer, also serves as a director of several private companies. Accordingly,
although these individuals devote such working hours as each deems reasonably
necessary to the business of the Company, they do not devote all of their
working hours to the Company's affairs.
SCIENTIFIC ADVISORY BOARD
The Scientific Advisory Board is composed of certain of the Company's
scientists and other leading scientists who have been actively involved in
pioneering HIV research. Scientific Advisory Board members meet as a group and
individually with management and key scientific employees of the Company on an
as-needed basis. Scientific Advisory Board members have taken an active role in
helping the Company identify scientific and product development opportunities
and recruiting and evaluating the Company's scientific staff. The Company has
granted options to acquire its Common Stock to members of the Scientific
Advisory Board.
The members of the Scientific Advisory Board and their experience are set
forth below:
ABUL K. ABBAS, M.D., Professor, Chairman, Department of Pathology,
University of California, San Francisco Medical Center. Dr. Abul Abbas is an
expert in the cellular interactions and cytokine regulation of the immune
response. Professor Abbas received his M.D. in India in 1968 and interned at
Harvard Medical School in 1970. He held the position of Professor of Pathology
at Harvard University Medical School from 1991 to 1999. Professor Abbas has also
received the Parke-Davis Award for Experimental Pathology (1987).
MARIO CLERICI, M.D., Associate Professor, Department of Immunology,
University of Milan, Italy. Dr. Clerici is a medical researcher with expertise
in the field of AIDS and HIV research. He is listed in Science Magazine as one
of the top ten quoted AIDS researchers from 1993-1995, and as a co-discoverer of
individuals with natural resistance to HIV. Dr. Clerici graduated in 1985 from
the University of Milan.
ALVIN FRIEDMAN-KIEN, M.D., Professor, New York University Medical Center,
New York. Since 1994, Dr. Friedman-Kien has been a Professor of Microbiology and
Dermatology at New York University Medical Center and Bellevue Hospital.
Dr. Friedman-Kien is a clinician and researcher with expertise in the field of
AIDS and AIDS related opportunistic infections. In particular, Professor
Friedman-Kien is an expert in the etiological relationship between HIV and other
human viruses. The detection of antibodies to HIV in urine was first reported by
Dr. Friedman-Kien. Dr. Friedman-Kien graduated in 1956 with a B.A. degree from
Brown University and received an M.D. degree from Yale University Medical School
in 1960.
TOBY D. GOTTFRIED, PH.D. has served as the Company's Director of Research
and Development since joining the Company in 1988. From 1983 until 1988 she was
a founding Senior Scientist of Carcinex Corporation, a cancer therapeutic
company. From 1978 until 1980, Dr. Gottfried was a scientist at the Hepatitis
Research Laboratory of the University of California, San Francisco Medical
Center. Her post-doctoral fellowship from 1980 until 1988 at the University of
California, Berkeley, was in the area of
18
monoclonal antibody attachment to toxins for targeting cancer cells.
Dr. Gottfried received her Ph.D. in Biochemistry from the University of
Pennsylvania and her B.S. from Cornell University.
HOWARD JOHNSON, PH.D., Graduate Research Professor, Department of
Microbiology and Cell Science at the University of Florida in Gainesville. From
1985 to 1988 he was Professor in the Department of Comparative and Experimental
Pathology at the University of Florida. Prior to this, Dr. Johnson was also on
the faculty of the University of Texas. He holds the patent on arginine
vasopressin-binding antihypertensive peptide. He is currently a member of a
National Advisory Council for the National Institutes of Health. Dr. Johnson
received his B.S. and Ph.D. degrees from Ohio State University.
NORMAN KLINMAN, M.D., PH.D., Member, Department of Immunology, The Scripps
Research Institute, La Jolla, California. Dr. Klinman received his M.D. in 1962
and Ph.D. in Microbiology in 1965 from the University of Pennsylvania. He served
on the faculty of the Department of Pathology and Microbiology at the University
of Pennsylvania for 10 years before accepting his current position in 1978 in
the Department of Immunology at Scripps.
DANIEL LANDERS, M.D., Director for the Division of Reproductive and
Infectious Diseases and Immunology, Department of Obstetrics, Gynecology &
Reproductive Sciences, Magee-Womens Hospital at the University of Pittsburgh.
From 1992 to 1995, Dr. Landers was Associate Professor for the Department of
Obstetrics, Gynecology and Reproductive Sciences at UCSF. He is a well-known
expert in sexually transmitted diseases in women, and the recipient of numerous
awards, including the Susman Memorial Award for the Infectious Diseases Society
of America, Young Investigator Award for Infectious Disease Society for OB/GYN,
an NIH Physician-Scientist Award, and the Pediatric AIDS Foundation Scholar
Award. He received his M.D. in 1980 at UCSF.
LUC MONTAGNIER, M.D., Director of Viral Oncology, Pasteur Institute, Paris,
France. Professor Montagnier began his career as a researcher at the Centre
National de la Recherche Scientifique. In 1972, he joined the Pasteur Institute
and formed the Division of Viral Oncology. In 1983, he discovered the HIV virus
and showed its etiologic role in AIDS. In 1985, his research team isolated the
second human AIDS virus (HIV-2) from West African patients. In 1998, Professor
Montagnier expanded his research efforts to the United States by accepting an
endowed professorship at Queens College, New York. He is in charge of the Center
for Molecular and Cellular Biology, where research efforts are focused on HIV
therapeutics and vaccines. Professor Montagnier also continues his research
efforts in Paris at both the Pasteur Institute and his World Foundation AIDS
Research and Prevention. Among the numerous honors and prizes received by
Professor Montagnier are the Rosen Price (1971), The Gallien Prize (1985), the
Lasker Prize (1986), the Gairdner Price (1987), the Japan Prize (1988), and the
Amsterdam Prize (1994). He is also a Comandeur de l'Ordre National merite and is
a Director of the French National Center of Scientific Research.
HOWARD B. URNOVITZ, PH.D. is the Company's Chief Science Officer, a
Director, and its founder. Prior to founding the Company in 1988, Dr. Urnovitz
was a Senior Scientist at the Institute of Cancer Research in San Francisco from
1985 to 1987. He was Director of Molecular and Cellular Engineering at Xoma
Corporation, a biotechnology corporation, from 1983 to 1985. Prior to this, he
was Director of the Hybridoma Laboratory at the University of Iowa.
Dr. Urnovitz received a B.S. in Microbiology and a Ph.D. in Microbiology from
the University of Michigan, and completed a post-doctoral study at Washington
University.
RISK FACTORS
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
19
ITEM 2. PROPERTIES
The Company leases approximately 22,000 square feet of office, research, and
manufacturing space in Alameda, California under a lease that expires in
November 2003 and includes an option to renew for one five-year period. The
Company also leases approximately 20,000 square feet of office, research, and
manufacturing space in Berkeley, California. The existing lease expires in
August 2000, with the option to renew on a monthly basis at the Company's
option.
Calypte also subleases properties in Rockville, Maryland. The sublease of
approximately 42,000 square feet of office and manufacturing space expires in
October 2006. An additional sublease of approximately 1,000 square feet of
manufacturing space expires March 2000, with no option to renew. During the
first quarter of 2000, the Company relocated the activities formerly conducted
in this facility to its primary leased space in Rockville. The Company believes
that existing facilities are adequate to support its activities for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Calypte's stockholders voted on four proposals at its 1999 annual meeting of
stockholders, which was held on November 18, 1999. Proposal 1 was to re-elect
all of the Calypte directors to serve as members of the Calypte Board of
Directors until the 2000 Annual Meeting.
Proposal 2 was to increase the number of shares of common stock reserved for
issuance under the 1991 Incentive Stock Plan by 500,000 shares.
Proposal 3 was to i) increase the number of shares of common stock reserved
for issuance under the 1999 Director Option Plan by 150,000 shares, ii) allow
option grantees thereunder to transfer some or all of their options so granted
to immediate family members during the lifetime of the grantee; iii) allow the
Board of Directors of Calypte to determine the number of options to be granted
to directors, provided that the number of options for each newly-elected
director in any given year will be the same for each such director and the
number of options for each re-elected director in any given year will be the
same for each such director; iv) provide for each grant under the plan to vest
monthly over the twelve month period commencing with the date of election or
re-election of the optionee as director, provided that such option will become
vested and fully exercisable on the date of the next annual meeting of
stockholders if such meeting ocurs less than one year after the date of grant;
v) provide that each option granted will be exercisable over a period of ten
years commencing with the date of such option grant to the extent the option has
become vested, regardless of whether the optionee has terminated service as a
board member provided, however, that if an optionee is removed from the board,
the option will terminate if it is not exercised within 90 days of the date of
such removal; and vi) allow non-employee directors who also serve as consultants
to the Company to participate in the Director Option Plan in order to account
for their separate service as directors.
Proposal 4 was to ratify the appointment by the Board of Directors of KPMG
LLP as independent auditors to audit the financial statements of the Company and
its consolidated subsidiaries for the fiscal year ending December 31, 1999.
20
Each nominee for the Board of Directors was re-elected at the 1999 Annual
Meeting. The following number of votes was cast for and against each nominee:
FOR AGAINST
---------- --------
William A. Boeger........................................... 14,380,850 136,642
David Collins............................................... 14,382,550 134,942
Nancy E. Katz............................................... 14,367,005 150,587
Howard B. Urnovitz, Ph.D.................................... 14,406,105 111,387
Paul Freiman................................................ 14,387,675 129,817
Julius R. Krevans, M.D...................................... 14,365,380 152,112
Mark Novitch, M.D........................................... 14,367,145 150,347
Zafar Randawa, Ph.D......................................... 14,418,579 98,913
John J. DiPietro............................................ 14,419,605 97,887
The three remaining proposals were also approved by the stockholders. The
following votes were tabulated:
BROKER
FOR AGAINST ABSTAIN NON-VOTE
---------- -------- -------- --------
Proposal 2..................................... 13,816,486 659,748 41,258 0
Proposal 3..................................... 13,886,433 561,816 69,243 0
Proposal 4..................................... 14,392,244 51,130 74,118 0
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on the NASDAQ SmallCap Market
on July 26, 1996 under the symbol "CALY." High and low sales prices reported by
NASDAQ during the periods indicated are shown below.
FISCAL YEAR QUARTER HIGH LOW
- ----------- ------- ---- -----------
1998........................................................ 1st 5 1/4 3 3/4
1998........................................................ 2nd 7 3/16 3 13/16
1998........................................................ 3rd 4 9/16 1 3/8
1998........................................................ 4th 4 7/16 1/2
1999........................................................ 1st 4 1/2 1 1/2
1999........................................................ 2nd 3 1/16 1
1999........................................................ 3rd 2 3/8 27/32
1999........................................................ 4th 2 1/16 11/16
On March 15, 2000, there were 286 holders of record of the Common Stock, and
the closing price of the Common Stock was $3 3/4. The Company has never paid any
cash dividends, and the Board of Directors does not anticipate paying cash
dividends in the foreseeable future. The Company intends to retain any future
earnings to provide funds for the operation and expansion of its business.
SALES OF COMMON STOCK
The Company sold its Common Stock to institutional investors in three
private placements between 1997 and 1999. In each instance, the proceeds were
used to fund Calypte's continuing operations. The shares sold in each of the
private placements were exempt from registration with the Securities and
Exchange Commission pursuant to Rule 506 of Regulation D of the Securities Act
of 1993 as amended
21
("Securities Act"). Shares were sold only to accredited investors as defined in
Rule 501 of the Securities Act. The transactions closed upon the effectiveness
of a Form S-3 Registration Statement that was filed in conjunction with each
private placement. Additional information regarding the common stock sales is
contained in the table below.
CLOSING DATE OCTOBER 1997 JANUARY 1999(1) APRIL 1999
- ------------ ---------------- ----------------- ----------------
Number of shares sold............ 2,600,999 3,102,500 3,398,000
Aggregate proceeds............... $11,054,246 $3,102,500 $7,645,500
Price per share.................. $ 4.25 $ 1.00 $ 2.25
Form S-3 Filing Date............. October 27, 1997 November 14, 1998 March 30, 1999
Form S-3 File Number............. 333-38417 333-66765 333-75239
- ------------------------
(1) Subscription amounts for this offering were recorded in 1998.
SUBSEQUENT EVENT
On March 2, 2000, the Company signed definitive agreements for the sale of
4,096,000 shares of Common Stock to institutional investors in a private
placement at $2.05 per share with an aggregate offering price of $8,396,800.
Calypte expects to receive net proceeds of approximately $8.3 million after
deducting expenses associated with the private placement. The Company also
issued warrants for 100,000 shares of its common stock to one of the investors
in return for a bridge loan prior to the closing of the private placement. The
warrants are exercisable at $3.62 per share. The shares sold in the private
placement were exempt from registration with the Securities and Exchange
Commission pursuant to Rule 506 of Regulation D of the Securities Act of 1933 as
amended ("Securities Act"). Shares were sold only to accredited investors as
defined in Rule 501 of the Securities Act. The Company filed a Form S-3
Registration Statement (File No. 333-32246) on March 13, 2000 to register the
shares for resale by the accredited investors. The Common Stock sale will close
following the effectiveness of the S-3 Registration Statement. The Company will
use the proceeds from the private placement to finance its continuing
operations.
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Presented below is the selected consolidated financial data for the years
ended December 31, 1999, 1998, 1997, 1996, and 1995 (in thousands).
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales....................................... $ 3,728 $ 951 $ 376 $ 130 $ --
-------- ------- ------- -------- --------
Total revenue..................................... 3,728 951 376 130 --
-------- ------- ------- -------- --------
Operating expenses:
Product costs....................................... 4,721 1,912 2,305 1,085 --
Research and development............................ 4,123 3,881 3,685 5,751 7,518
Selling, general and administrative................. 5,081 3,925 2,317 3,333 2,862
-------- ------- ------- -------- --------
Total expenses.................................... 13,925 9,718 8,307 10,169 10,380
-------- ------- ------- -------- --------
Loss from operations............................ (10,197) (8,767) (7,931) (10,039) (10,380)
Interest income (expense), net........................ 171 308 139 (74) 78
Other income.......................................... 2 1 -- 15 12
-------- ------- ------- -------- --------
Loss before income taxes and extraordinary
item.......................................... (10,024) (8,458) (7,792) (10,098) (10,290)
Income taxes.......................................... (2) (2) (2) (2) (1)
-------- ------- ------- -------- --------
Net loss........................................ (10,026) (8,460) (7,794) (10,100) (10,291)
Less dividend on mandatorily redeemable Series A
preferred stock..................................... (120) (120) (120) (120) (120)
-------- ------- ------- -------- --------
Net loss attributable to common stockholders.... $(10,146) $(8,580) $(7,914) $(10,220) $(10,411)
======== ======= ======= ======== ========
Net loss per share attributable to common
stockholders.................................. $ (0.52) $ (0.64) $ (0.72) $ (1.17) $ (1.53)
======== ======= ======= ======== ========
Weighted average shares used to compute net loss
per share attributable to common
stockholders.................................. 19,333 13,432 11,028 8,753 6,792
======== ======= ======= ======== ========
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 2,652 $ 3,121 $ 10,820 $ 7,924 $ 2,559
Securities available for sale............................ 503 650 -- -- --
Working capital.......................................... 1,860 4,444 8,917 6,067 (2,402)
Total assets............................................. 7,821 9,945 12,950 10,347 5,337
Long-term portion of capital lease obligations and notes
payable................................................ 50 23 282 764 543
Mandatorily redeemable Series A preferred stock.......... 2,216 2,096 1,976 1,856 1,736
Accumulated deficit...................................... (66,781) (56,755) (48,295) (40,501) (30,401)
Total stockholders' equity (deficit)..................... 1,330 4,631 8,069 5,416 (2,746)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Calypte's efforts currently are primarily focused on expanding the sales and
marketing of its HIV-1 urine-based and serum-based diagnostic tests and on
improving its products and processes. In the summer of 1998, upon receipt of
license for both its screening and supplemental tests, the Company began the
marketing and sale in the U.S. of the only available FDA-approved urine-based
HIV test method. There can be no assurance the Company will have significant
revenues from sales of the HIV-1 urine screening assay or the supplemental test.
23
In December 1998, Calypte acquired from Cambridge Biotech certain assets
relating to the Western Blot product line for certain infectious diseases. The
acquisition included the urine-based and serum-based HIV-1 Western Blot
products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
The Company expects operating losses to continue in the near future as it
continues to expand its marketing and sales activities for its current
FDA-approved products and conducts additional research and development for
process improvements and new products. The Company's marketing strategy is to
use distributors, focused direct selling and marketing partners to penetrate
certain targeted domestic markets. The Company maintains a small direct sales
force to sell the Company's urine-based HIV-1 test to laboratories serving the
life insurance market. International and other U.S. markets will be addressed
utilizing diagnostic product distributors. There can be no assurance that the
Company's products will be successfully commercialized or that the Company will
achieve significant product revenues. In addition, there can be no assurance
that the Company will achieve or sustain profitability in the future.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Calypte's product sales increased by $2.8 million to $3.7 million for the
year ended December 31, 1999 compared to $951,000 for the year ended December
31, 1998. $2.5 million of the increase in sales revenues in 1999 is due to the
inclusion of product sales related to the December 1998 acquisition of certain
assets of Cambridge Biotech Corporation. Sales of Calypte's HIV-1 urine
screening test also increased compared to 1998.
Product costs increased by $2.8 million from $1.9 million for the year ended
December 31, 1998 to $4.7 million for the year ended December 31, 1999. The
increase was a result of increased sales volume of the Company's HIV-1 screening
test, an increase of $2.0 million in costs from product sales related to
acquired assets of Cambridge Biotech Corporation and costs associated with the
production of non-saleable inventory during the validation of the Company's
Alameda manufacturing facility.
Research and development expenses increased by 6% to $4.1 million for the
year ended December 31, 1999 versus $3.9 million for the prior year. The
increase is a result of higher minimum product license fees, the write-off of
the notes and accrued interest from Pepgen as research and development costs and
the expense of consultants and other costs associated with the validation of the
Alameda manufacturing facility, offset by a reduction in research and
development personnel and the cost of clinical investigations.
Selling, general and administrative expenses increased 29% to $5.1 million
for the year ended December 31, 1999 versus $3.9 million for the year ended
December 31, 1998. The increase results primarily from the inclusion for the
entire year of 1999 of general and administrative expenses related to the
Maryland manufacturing facility acquired from Cambridge Biotech Corporation in
December 1998, offset by a reduction in the use of consultants in 1999.
Interest income, interest expense, and other income decreased by 44% to
$173,000 for the year ended December 31, 1999 from $309,000 for the year ended
December 31, 1998. The decrease was primarily due to a reduction in interest
earned on cash balances and securities available for sale coupled with an
increase in interest expense related to borrowings under the bank line of
credit.
YEARS ENDED DECEMBER 31, 1998 AND 1997
Product sales for Calypte increased $575,000 to $951,000 for the year ended
December 31, 1998 from $376,000 for the year ended December 31, 1997. The
increase in product sales was primarily due to higher sales volume of our HIV-1
screening test in anticipation of and after FDA approval of the urine HIV-1
Western Blot test.
24
Product costs decreased 17% to $1.9 million for the year ended December 31,
1998 from $2.3 million for the year ended December 31, 1997. Product costs for
the year ended December 31, 1997 were higher because a greater quantity of
product produced was expensed since it was not retained as saleable inventory.
During the year ended December 31, 1998, a greater quantity of product was
valued as inventory (raw materials, work-in-process and finished goods) after
FDA approval of the supplemental test for Calypte's HIV-1 urine screening test.
Research and development expenses increased 5% to $3.9 million for the year
ended December 31, 1998 from $3.7 million in the corresponding period of the
prior year. The increase was principally due to clinical investigations
performed for an unsuccessful study to determine if HIV-1 antibodies could be
found in urine when the same person tests negative for HIV-1 antibodies in
blood, higher minimum product license fees, research funding made to outside
organizations and more personnel hired to complete research and development
studies.
Selling, general and administrative expenses increased $1.6 million or 69%
to $3.9 million for the year ended December 31, 1998 from $2.3 million for the
year ended December 31, 1997. The increase was primarily related to the increase
in the use of consultants related to various projects and increased expenses
related to the launch and marketing of our HIV-1 urine screening test and
Western Blot supplemental test.
Net interest income increased $169,000 to $308,000 for the year ended
December 31, 1998 from $139,000 for the year ended December 31, 1997. The
increase was primarily due to the interest earned from proceeds of a private
placement of common stock in October 1997, the decrease in interest paid for
capital leases and interest earned on loans made to officers and employees and
Pepgen Corporation.
LIQUIDITY AND CAPITAL RESOURCES
FINANCING ACTIVITIES
The Company has financed its operations from its inception primarily through
the private placement of preferred stock and common stock, its Initial Public
Offering (IPO) of common stock and, to a lesser extent, from payments related to
research and development agreements, a bank line of credit, equipment lease
financings and borrowings from notes payable.
During 1996, the Company completed its IPO of 2,536,259 shares of its Common
Stock at $6.00 per share. After deducting underwriters' discounts and
commissions and additional expenses associated with the IPO, the Company
received net proceeds of $13.2 million. Part of the proceeds was used to pay
down a $1.25 million bank line of credit, a $248,000 note payable to a former
related party and the Pepgen note payable of $1 million. The Pepgen note payable
was paid in October 1996.
In October 1996, the Company entered into an equipment lease line of credit
for $1.0 million expiring on December 31, 1996. Lease payments under the line of
credit are based on the total delivered equipment cost multiplied by a monthly
note factor of approximately 3.3% (approximate effective interest rate of 18%).
In December 1996, there was a drawdown of $362,000 on this equipment lease line
of credit. The equipment lease line of credit expired at the end of 1996. The
lease agreement expired in December 1999 and was subsequently renewed for an
additional three-year term.
In April 1997, the Company entered into a line of credit agreement with a
bank to borrow up to $2.0 million at an interest rate of prime plus 2%. The
agreement required the Company to maintain certain financial covenants and
comply with certain reporting and other requirements. In addition, the Company's
assets secured borrowings under the line of credit agreement. In June 1997, the
Company drew down $500,000 on the line of credit. Subsequently, in July 1997,
the Company drew down an additional $500,000 on the line of credit, thereby
increasing the note payable to $1.0 million. The $1.0 million was repaid in
September 1997 and the line of credit was terminated.
25
In October 1997, the Company completed a private placement of 2,600,999
shares of its Common Stock at $4.25 per share. The Company received proceeds of
approximately $10.2 million after deducting placement agent commissions and
additional expenses associated with the private placement.
In January 1999, the Company completed a private placement of 3,102,500
shares of Common Stock to institutional investors at $1.00 per share. Calypte
received net proceeds of approximately $3.1 million after deducting placement
agent commissions and additional expenses associated with the private placement.
In April 1999, the Company completed a private placement of 3,398,000 shares
of its Common Stock to institutional investors at $2.25 per share. Calypte
received net proceeds of approximately $6.8 million after deducting agent
commissions and additional expenses associated with the private placement.
In January 1999, the Company entered into a line of credit agreement with a
bank to borrow up to $2.0 million at an interest rate of prime plus 1 1/4%. The
agreement requires the Company to maintain certain financial covenants and
comply with certain reporting and other requirements. In addition, the Company's
assets secure its borrowings under the line of credit agreement. In
January 1999, Calypte drew down $2.0 million on the line of credit. In
November 1999, the agreement was amended to increase the line of credit to $2.25
million and to extend the term through August 2000. In December 1999, Calypte
drew down the additional $250,000 available under the line. During 1999, the
Company repaid $1,406,000 on the line of credit. In January 2000 the agreement
was amended to extend the maturity to August 2001.
In March 2000, the Company announced the signing of definitive documents
relating to a private placement of 4,096,000 shares of its Common Stock at $2.05
per share. The Company expects to receive proceeds of approximately $8.3
million, after deducting expenses associated with the transaction, when the
transaction is completed following the effectiveness of a registration statement
filed by Calypte covering the resale of the shares by the investors. In
connection with a bridge loan of $1 million from one of the investors, Calypte
also issued warrants for 100,000 shares of Common Stock with an exercise price
of $3.62 per share. The bridge loan will be converted to equity when the
transaction closes.
Although the Company believes current cash will be sufficient to meet the
Company's operating expenses and capital requirements for the next twelve
months, the Company's future liquidity and capital requirements will depend on
numerous factors, including market acceptance of its products, improvements in
the costs and efficiency of its manufacturing processes, regulatory actions by
the FDA and other international regulatory bodies, intellectual property
protection, and the ability, if necessary, to raise additional capital in a
timely manner.
There can be no assurance that the Company will be able to achieve
improvements in its manufacturing processes or that the Company will achieve
significant product revenues. In addition, there can be no assurance that the
Company will achieve or sustain profitability in the future. There can be no
assurance that the Company will not be required to raise additional capital or
that such capital will be available on acceptable terms, if at all. Any failure
to raise additional financing, if needed, will likely place us in significant
financial jeopardy. Therefore, the Company cannot predict the adequacy of its
capital resources on a long-term basis.
OPERATING ACTIVITIES
For the years ended December 31, 1999 and 1998, the Company's cash used in
operations was $8.0 million and $7.5 million, respectively. The cash used in
operations was primarily to fund research and development as well as
manufacturing expenses related to the urine-based and serum-based HIV-1 tests
along with selling, general and administrative expenses of the Company.
26
YEAR 2000 PROGRAM
The Company experienced no problems as a result of the Year 2000 issue, and
expects none in the future. Expenditures relating to upgrading systems at our
California and Maryland facilities were within the Company's expectations.
SUBSEQUENT EVENT
In March 2000, Calypte announced that William Boeger, its Chairman, and
Howard Urnovitz, its founder and Chief Scientific Officer, had established a
commercial company named Chronix Biomedical that will focus on novel ways to
detect aberrant genes in individuals with chronic diseases. Chronix will be
financed independently of Calypte and Calypte will not have an equity interest
in Chronix. Calypte will have a right of first refusal to license any
urine-based diagnostic tests that result from Dr. Urnovitz's work, as well as
from Chronix' research efforts, pursuant to Technology Rights Agreements which
Calypte has with Dr. Urnovitz and with Chronix. Such Technology Rights
Agreements expire on March 1, 2007 unless otherwise agreed in writing by Calypte
with the relevant licensor. Under such Technology Rights Agreements, Calypte
will have a period of time, after disclosure to Calypte by Dr. Urnovitz or
Chronix, as the case may be, of the relevant developed technology, to license
such technology on an exclusive, worldwide basis in perpetuity; in exchange for
a license fee equal to the direct cost of the relevant licensor in developing
such technology, plus a running royalty equal to 5% of Calypte's net sales of
products and services using such licensed technology. Both Mr. Boeger and Dr.
Urnovitz will maintain their current positions at Calypte.
RISK FACTORS
Calypte has identified a number of risk factors and uncertainties faced by
the Company. These factors, among others, may cause actual results, events or
performance to differ materially from those expressed in any forward-looking
statements made in this Form 10-K. Investors should be aware of the existence of
these factors.
UNCERTAIN MARKET ACCEPTANCE OF OUR NEW METHOD OF DETERMINING THE PRESENCE OF
HIV ANTIBODIES. Our products incorporate a new method of determining the
presence of HIV antibodies. There can be no assurance that we will obtain:
- any significant degree of market acceptance among physicians, patients or
health care payors; or
- recommendations and endorsements by the medical community which are
essential for market acceptance of the products.
We have FDA approval to market our urine HIV-1 screening and supplemental
tests in the United States and in July, 1998 we began marketing this product.
However, to date this product has only generated limited revenues and not
achieved significant market penetration. The failure of our products to obtain
market acceptance would have a material adverse effect on us.
WE HAVE LIMITED EXPERIENCE SELLING AND MARKETING OUR HIV-1 URINE-BASED
SCREENING TEST. We have little experience marketing and selling our products
either directly or through our distributors. The success of our products depends
upon alliances with third-party distributors including the distribution
agreement announced in September 1999 with Carter-Wallace Inc. There can no
assurance that:
- our direct selling efforts will be effective;
- our distributors will market successfully our products; or
- if our relationships with distributors terminate, we will be able to
establish relationships with other distributors on satisfactory terms, if
at all.
27
Any disruption in our distribution, sales or marketing network could have a
material adverse effect on us.
WE HAVE SUSTAINED LOSSES IN THE PAST AND WE EXPECT TO SUSTAIN LOSSES IN THE
FUTURE. We have incurred losses in each year since our inception. Our net loss
for the year ended December 31, 1999 was $10.0 million and our accumulated
deficit as of December 31, 1999 was $66.8 million. We expect operating losses to
continue as we continue our marketing and sales activities for our FDA-approved
products and conduct additional research and development for product and process
improvements and new products.
OUR QUARTERLY RESULTS MAY FLUCTUATE DUE TO CERTAIN REGULATORY, MARKETING AND
COMPETITIVE FACTORS OVER WHICH WE HAVE LITTLE OR NO CONTROL. The factors listed
below, some of which we cannot control, may cause our revenues and results of
operations to fluctuate significantly:
- actions taken by the FDA or foreign regulatory bodies relating to our
products;
- the extent to which our products and our Sentinel HIV and STD testing
service gain market acceptance;
- the timing and size of distributor purchases; and
- introductions of alternative means for testing for HIV by competitors.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING THAT WE MAY NEED IN THE
FUTURE. The report of KPMG LLP covering the December 31, 1999 consolidated
financial statements contains an explanatory paragraph that states that our
recurring losses from operations and accumulated deficit raise substantial doubt
about our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty. We may need to raise more money to continue to finance our
operations. We may not be able to obtain additional financing on acceptable
terms, or at all. Any failure to raise additional financing, if needed, will
likely place us in significant financial jeopardy.
WE DEPEND UPON THE VIABILITY OF THREE PRODUCTS--OUR HIV-1 URINE-BASED
SCREENING TEST AND OUR URINE AND BLOOD BASED SUPPLEMENTAL TESTS. Our HIV-1
urine-base screening test and urine and blood-based supplemental tests are our
only products. Accordingly, we may have to cease operations if our tests fail to
achieve market acceptance or generate significant revenues.
OUR PRODUCTS DEPEND UPON RIGHTS TO TECHNOLOGY THAT WE HAVE LICENSED FROM
THIRD PARTY PATENT HOLDERS AND THERE CAN BE NO ASSURANCE THAT THE RIGHTS WE HAVE
UNDER THESE LICENSING AGREEMENTS ARE SUFFICIENT OR THAT WE CAN ADEQUATELY
PROTECT THOSE RIGHTS. We currently have the right to use patent and proprietary
rights which are material to the manufacture and sale of our HIV-1 urine-based
screening test under licensing agreements with New York University, Cambridge
Biotech Corporation, Repligen, and the Texas A&M University System.
WE RELY ON SOLE SOURCE SUPPLIERS THAT WE CANNOT QUICKLY REPLACE FOR CERTAIN
COMPONENTS CRITICAL TO THE MANUFACTURE OF OUR PRODUCTS. Any delay or
interruption in the supply of these components could have a material adverse
effect on us by significantly impairing our ability to manufacture products in
sufficient quantities, particularly as we increase our manufacturing activities
in support of commercial sales.
WE HAVE LIMITED EXPERIENCE IN MANUFACTURING OUR PRODUCTS AND LITTLE
EXPERIENCE IN MANUFACTURING OUR PRODUCTS IN COMMERCIAL QUANTITIES. We may
encounter difficulties in scaling-up production of new products, including
problems involving:
- production yields;
- quality control and assurance;
- raw material supply; and
28
- shortages of qualified personnel.
THE SUCCESS OF OUR PLANS TO ENTER INTERNATIONAL MARKETS MAY BE LIMITED OR
DISRUPTED DUE TO RISKS RELATED TO INTERNATIONAL TRADE AND MARKETING AND THE
CAPABILITIES OF OUR DISTRIBUTORS. We anticipate that international distributor
sales will generate a significant portion of our revenues for the next several
years. We believe that our urine-based test can provide significant benefits in
countries that do not have the facilities or personnel to safely and effectively
collect and test blood samples. The following risks may limit or disrupt our
international sales:
- the imposition of government controls;
- export license requirements
- political instability;
- trade restrictions;
- changes in tariffs;
- difficulties in managing international operations; and
- fluctuations in foreign currency exchanges rates.
Some of our distributors have limited international marketing experience.
There can be no assurance that these distributors will be able to successfully
market our products in foreign markets.
WE FACE INTENSE COMPETITION IN THE MEDICAL DIAGNOSTIC PRODUCTS MARKET AND
RAPID TECHNOLOGICAL ADVANCES BY COMPETITORS. Competition in our diagnostic
market is intense and we expect it to increase. Within the United States, our
competitors include a number of well-established manufacturers of HIV tests
using blood samples, plus at least one system for the detection of HIV
antibodies using oral fluid samples. Many of our competitors have significantly
greater financial, marketing and distribution resources than we do. Our
competitors may succeed in developing or marketing technologies and products
that are more effective than ours. These developments could render our
technologies or products obsolete or noncompetitive or otherwise have a material
adverse effect on us.
OUR ABILITY TO MARKET OUR PRODUCTS DEPENDS UPON OBTAINING AND MAINTAINING
FDA AND FOREIGN REGULATORY APPROVALS. Numerous governmental authorities in the
United States and other countries regulate our products. The FDA regulates our
products under federal statutes and regulations related to pre-clinical and
clinical testing, manufacturing, labeling, distribution, sale and promotion of
medical devices in the United States.
If we fail to comply with FDA regulations, or the FDA believes that we are
not in compliance with such regulations, the FDA can:
- detain or seize our products;
- issue a recall of our products;
- prohibit marketing and sales of our products; and
- assess civil and criminal penalties against us, our officers or our
employees.
We also plan to sell our products in certain foreign countries where they
may be subject to similar local regulatory requirements. The imposition of any
of the sanctions described above could have a material adverse effect on us.
The regulatory approval process in the United States and other countries is
expensive, lengthy and uncertain. We may not obtain necessary regulatory
approvals or clearances in a timely manner, if at all. We
29
may lose previously obtained approvals or clearances or fail to comply with
regulatory requirements. The occurrence of any of these events would have a
material adverse effect on Calypte.
Before we begin to manufacture our product at the Alameda facility, we must
obtain FDA approval for that facility. Delays in receiving the FDA's approval or
other difficulties which we encounter in scaling-up our manufacturing capacity
to meet demand could have a material adverse effect on us.
WE HAVE RECEIVED WARNING LETTERS FROM THE FDA REGARDING THE SUFFICIENCY OF
OUR MANUFACTURING RECORDS AND PRODUCTION PROCEDURES AND WE MUST SATISFY THE
FDA'S CONCERNS IN ORDER TO AVOID REGULATORY ACTION AGAINST US. See
"Business--Manufacturing" section with respect to these Warning Letters.
AS A SMALL MANUFACTURER OF MEDICAL DIAGNOSTIC PRODUCTS, WE ARE EXPOSED TO
PRODUCT LIABILITY AND RECALL RISKS FOR WHICH INSURANCE COVERAGE IS EXPENSIVE,
LIMITED AND POTENTIALLY INADEQUATE. We manufacture medical diagnostic products,
which subjects us to risks of product liability claims or product recalls,
particularly in the event of false positive or false negative reports. A product
recall or a successful product liability claim or claims which exceed our
insurance coverage could have a material adverse effect on us. We maintain a
$10,000,000 claims made policy of product liability insurance. However, product
liability insurance is expensive. In the future we may not be able to obtain
coverage on acceptable terms, if at all. Moreover, our insurance coverage may
not adequately protect us from liability which we incur in connection with
clinical trials or sales of our products.
OUR CHARTER DOCUMENTS MAY INHIBIT A TAKEOVER. Certain provisions of our
Certificate of Incorporation and Bylaws could:
- discourage potential acquisition proposals;
- delay or prevent a change in control of Calypte;
- diminish stockholders' opportunities to participate in tender offers for
our common stock, including tender offers at prices above the then current
market price; or
- inhibit increases in the market price of our common stock that could
results from takeover attempts.
WE HAVE ADOPTED A SHAREHOLDER RIGHTS PLAN THAT HAS CERTAIN ANTI-TAKEOVER
EFFECTS. On December 15, 1998, the Board of Directors of Calypte declared a
dividend distribution of one preferred share purchase right ("Right") for each
outstanding share of Common Stock of the Company. The dividend was payable to
the stockholders of record on January 5, 1999 with respect to each share of
Common Stock issued thereafter until a subsequent "distribution date" defined in
a Rights Agreement and, in certain circumstances, with respect to shares of
Common Stock issued after the Distribution Date.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired. However, the Rights should not interfere with
any tender offer, or merger, which is approved by the Company because the Rights
do not become exercisable in the event of an offer or other acquisition exempted
by Calypte's Board of Directors.
AN INVESTOR'S ABILITY TO TRADE OUR COMMON STOCK MAY BE LIMITED BY TRADING
VOLUME. The trading volume in our common shares has been relatively limited. A
consistently active trading market for our common stock may not develop.
WE MAY BE REMOVED FROM THE NASDAQ SMALLCAP MARKET IF WE FAIL TO MEET CERTAIN
MAINTENANCE CRITERIA. The Nasdaq Stock Market inquired on two occasions whether
we continue to meet the net capital surplus maintenance criterion for trading on
the Nasdaq SmallCap Market. We currently meet the maintenance criterion but our
ability to continue to do so will depend on whether we are able to maintain net
tangible assets of $2,000,000 and whether the minimum bid price for our common
stock exceeds $1.00 per share for
30
at least ten consecutive business days during any period of 120 consecutive
business days. The public trading of our common stock and the ability of our
stockholders to sell their shares could be significantly impaired if we fail to
meet the maintenance criteria and are removed from the Nasdaq SmallCap Market.
In that case, our common stock would trade on either the OTC bulletin board, a
regional exchange or in the pink sheets, which would likely result in an even
more limited trading volume.
THE PRICE OF CALYPTE'S COMMON STOCK HAS BEEN HIGHLY VOLATILE DUE TO SEVERAL
FACTORS WHICH WILL CONTINUE TO EFFECT THE PRICE OF OUR STOCK. Our common stock
has traded as low as $0.69 per share and as high as $7.25 per share between
early-November 1999 and mid-March 2000. Some of the factors leading to the
volatility include:
- price and volume fluctuations in the stock market at large which do not
relate to our operating performance;
- fluctuations in our operating results;
- announcements of technological innovations or new products which we or our
competitors make;
- FDA and international regulatory actions;
- availability of reimbursement for use of our products from private health
insurers, governmental health administration authorities and other
third-party payors;
- developments with respect to patents or proprietary rights;
- public concern as to the safety of products that we or others develop;
- changes in health care policy in the United States or abroad; and
- changes in stock market analysts' recommendations regarding Calypte, other
medical products companies or the medical product industry generally.
CALYPTE AND THE PRICE OF CALYPTE SHARES MAY BE ADVERSELY EFFECTED BY THE
PUBLIC SALE OF A SIGNIFICANT NUMBER OF THE SHARES ELIGIBLE FOR FUTURE SALE. All
outstanding shares of our common stock are freely tradable. Sales of common
stock in the public market could materially adversely affect the market price of
our common stock. Such sales also may inhibit our ability to obtain future
equity or equity-related financing on acceptable terms.
OUR RESEARCH AND DEVELOPMENT OF HIV URINE TEST INVOLVES THE CONTROLLED USE
OF HAZARDOUS MATERIALS. There can be no assurance that our safety procedures for
handling and disposing of hazardous materials such as azide will comply with
applicable regulations. In addition, we cannot eliminate the risk of accidental
contamination or injury from these materials. We may be held liable for damages
from such an accident and that liability could have a material adverse effect on
us.
WE MAY NOT BE ABLE TO RETAIN OUR KEY EXECUTIVES AND RESEARCH AND DEVELOPMENT
PERSONNEL. As a small company with only 60 employees, our success depends on
the services of key employees in executive and research and development
positions. The loss of the services of one or more of such employees could have
a material adverse effect on us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the value of the investment to fluctuate. For example, if we purchase
a security that was issued with a fixed interest rate and the prevailing
interest rate later rises, the value of our investment will probably decline. To
minimize this risk in the future, we intend to maintain our portfolio of
31
cash equivalents and short-term investments in a variety of securities including
commercial paper, money market funds and government and non-government debt
securities. In general, money market funds are not subject to market risk
because the interest paid on such funds fluctuates with the prevailing interest
rate. As of December 31, 1999, we neither had any holdings of derivative
financial or commodity instruments, nor any foreign currency denominated
transactions, and all of our cash and cash equivalents were in money market and
checking funds.
The Company has a line of credit outstanding, which is carried at cost (see
Note 7 to the Consolidated Financial Statements), with an interest rate which is
referenced to market rates. Interest rate changes generally do not affect the
fair value of variable rate debt instruments, but do impact future earnings and
cash flows. Holding debt levels constant, a one percentage point increase in
interest rates would decrease earnings and cash flows for variable rate debt by
approximately $8,000.
Our Series A redeemable preferred stock is carried at its redemption value
which approximates fair value and it is not subject to interest rate risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements are included on pages F-1
through F-28 of this Annual Report on Form 10-K.
The following table presents summarized historical quarterly results of
operations for each of the fiscal quarters in the Company's fiscal years ended
December 31, 1999 and 1998. These quarterly results are unaudited, but, in the
opinion of management, have been prepared on the same basis as the Company's
audited financial information and include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The data should be read in conjunction with the
Financial Statements and related notes included on pages F-1 through F-28 of
this Annual Report on Form 10-K.
The Company expects that its revenues and results of operations may
fluctuate significantly from quarter to quarter and will depend on a number of
factors, many of which are outside the Company's control. These factors include
actions relating to regulatory matters, the extent to which the Company's
products gain market acceptance, the timing and size of distributor purchases,
introduction of alternative means for testing for HIV, competition, the timing
and cost of new product introductions, and general economic conditions.
32
HISTORICAL QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
Total revenues........................................... $ 834 $ 914 $ 1,077 $ 903
Operating expenses....................................... 3,787 3,248 3,447 3,443
Interest income (expense) and other income............... 29 69 45 30
Income taxes............................................. (2) -- -- --
Dividend on mandatorily redeemable Series A preferred
stock.................................................. (30) (30) (30) (30)
------- ------- ------- -------
Net loss attributable to common stockholders............. $(2,956) $(2,295) $(2,355) $(2,540)
------- ------- ------- -------
Net loss per share attributable to common
stockholders*.......................................... $ (0.18) $ (0.11) $ (0.12) $ (0.12)
------- ------- ------- -------
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
Total revenues........................................... $ 241 $ 296 $ 147 $ 267
Operating expenses....................................... 1,964 2,576 2,799 2,379
Interest income (expense) and other income............... 117 86 63 43
Income taxes............................................. -- (2) -- --
Dividend on mandatorily redeemable Series A preferred
stock.................................................. (30) (30) (30) (30)
------- ------- ------- -------
Net loss attributable to common stockholders............. $(1,636) $(2,226) $(2,619) $(2,099)
------- ------- ------- -------
Net loss per share attributable to common
stockholders*.......................................... $ (0.12) $ (0.17) $ (0.20) $ (0.16)
------- ------- ------- -------
- ------------------------
* The sum of earnings per share for the four quarters is different from the
full year amount as a result of computing the quarterly and full year
amounts on the weighted average number of common shares outstanding in the
respective periods.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers and directors of the Company as of February 29, 2000:
NAME AGE POSITION
- ---- -------- --------------------------------------
William A. Boeger..................... 50 Chairman of the Board of Directors
David E. Collins...................... 65 Vice Chairman of the Board of
Directors and Chief Executive Officer
Nancy E. Katz......................... 40 President, Chief Operating Officer,
Chief Financial Officer and Member of
the Board of Directors
Howard B. Urnovitz, Ph.D.............. 46 Chief Science Officer and Member of
the Board of Directors
John J. DiPietro...................... 41 Member of the Board of Directors
Paul Freiman(2)....................... 65 Member of the Board of Directors
Julius R. Krevans, M.D.(2)(3)......... 75 Member of the Board of Directors
Mark Novitch, M.D.(1)(2)(3)........... 67 Member of the Board of Directors
Zafar Randawa, Ph.D(1)................ 52 Member of the Board of Directors
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Member of the Nominating Committee
WILLIAM A. BOEGER has served as the Company's Chairman of the Board since
January 1994. He is currently serving as a consultant to the Company under the
terms of an agreement extending through October 2000. From January 1994 until
September 1995, and from December 1997 until October 1999, Mr. Boeger also
served as the Company's President and Chief Executive Officer. Mr. Boeger has
been a director of the Company since 1991. He is a founder and Managing General
Partner of Quest Ventures, a venture capital partnership. Prior to entering the
venture capital field, he worked in research at Harvard Medical School and Peter
Bent Brigham Hospital and served on the faculty of the Amos Tuck Business School
at Dartmouth College. Mr. Boeger also serves as President, Chief Executive
Officer, and board member of Pepgen Corporation, a company in which Calypte has
a minority interest. Along with Dr. Urnovitz, the Company's Chief Science
Officer, Mr. Boeger has recently announced the formation of Chronix Biomedical,
a commercial company that will focus on novel ways to detect aberrant genes in
individuals with chronic diseases. Mr. Boeger also serves on the Board of
Directors of IRIDEX Corporation, Cell Pathways, Inc., and several private
life-sciences companies and non-profit corporations. Mr. Boeger received his
M.B.A. from Harvard Business School and his B.S. from Williams College.
DAVID E. COLLINS was elected as the Company's Chief Executive Officer in
October 1999. He has served as the Company's Vice Chairman of the Board of
Directors since December 1997, and has been a member of the Board of Directors
since December 1995. From September 1989 until September 1994 he served as
Executive Vice President with Schering-Plough Corporation, a pharmaceutical
company, and President of the HealthCare Products division, responsible for all
over-the-counter ("OTC") and consumer health care products. From February 1988
to August 1989, he was a founding partner of Galen Partners, a venture capital
firm. From July 1962 to February 1988, he held several positions at Johnson &
Johnson, including Vice Chairman of the Board of Directors for Public Affairs &
Planning and Vice Chairman for the Executive Committee & Chairman of the
Consumer Sector. Mr. Collins is also a member of the Board of
34
Directors of Lander, Inc., Advanced Corneal Systems, Inc., Beansprout Networks,
Inc., and Claneil Enterprises, Inc., all private companies. Mr. Collins received
his L.L.B. at Harvard Law School and his B.A. at the University of Notre Dame.
NANCY E. KATZ was elected the Company's President, Chief Operating Officer,
and Chief Financial Officer in October 1999. Prior to joining Calypte, Ms. Katz
served as president of Zila Pharm Inc., a prescription and non-prescription oral
health care products company. From 1995 to 1998, Ms. Katz led sales and
marketing efforts for LifeScan, the diabetes testing division of Johnson &
Johnson. Ms. Katz also served as vice president of U.S. marketing, directing
LifeScan's marketing and customer call center departments. During her seven-year
career at Shering-Plough Healthcare Products from 1987 to 1994, she held
numerous positions including senior director, and general manager, marketing
director, Footcare New Products, and product director, OTC New Products.
Ms. Katz also held various product management positions at Whitehall
Laboratories, a division of American Home Products, from 1981 to 1987. Ms. Katz
received her B.A. from the University of South Florida.
HOWARD B. URNOVITZ, PH.D. is the founder of the Company and serves as Chief
Science Officer. Prior to founding the Company in 1988, Dr. Urnovitz was a
Senior Scientist at the Institute of Cancer Research in San Francisco from 1985
to 1987. He was Director of Molecular and Cellular Engineering at Xoma
Corporation, a biotechnology corporation, from 1983 to 1985. Prior to this, he
was Director of the Hybridoma Laboratory at the University of Iowa. Along with
Mr. Boeger, the Company's Chairman of the Board of Directors, Dr. Urnovitz has
recently announced the formation of Chronix Biomedical, a commercial company
that will focus on novel ways to detect aberrant genes in individuals with
chronic diseases. Dr. Urnovitz also serves as Science Director of both Chronic
Illness Research Foundation, a non-profit organization that conducts basic
research, and Pepgen Corporation, a company in which Calypte has a minority
interest. Dr. Urnovitz received a B.S. in Microbiology and a Ph.D. in
Microbiology from the University of Michigan, and completed a post-doctoral
study at Washington University.
JOHN J. DIPIETRO was elected to the Company's Board of Directors in October
1999. He also serves as a consultant to the Company under the terms of a
consulting contract extending through September 2000. He is presently the Chief
Financial Officer and Vice President--Finance and Administration of TriPath
Technology, Inc., a privately-held semi-conductor manufacturing company. He had
served as the Company's Chief Operating Officer, Vice President of Finance,
Chief Financial Officer and Secretary since December 1997. From October 1995
until December 1997, he served as the Vice President of Finance, Chief Financial
Officer and Secretary. Prior to joining the Company, he was Vice President of
Finance, Chief Financial Officer and Secretary of Meris Laboratories, Inc., a
full service clinical laboratory, from 1991 until 1995. He is a Certified Public
Accountant and received his M.B.A. from the University of Chicago, Graduate
School of Business and a B.S. in Accounting from Lehigh University.
PAUL FREIMAN has served as a member of the Company's Board of Directors
since December 1997. He has served as the President and Chief Executive Officer
of Neurobiological Technologies, Inc since May 1997. In 1995, Mr. Freiman
retired from his position as Chairman and Chief Executive Officer of Syntex
Corporation, a pharmaceutical company. From 1962 until 1994, he held several
other positions at Syntex Corporation, including President and Chief Operating
Officer. Mr. Freiman is currently serving on the board of Penwest
Pharmaceuticals Corp., Neurobiological Technologies, Inc. and several other
biotechnology companies. He has been chairman of the Pharmaceutical
Manufacturers Association of America (PhARMA) and has also chaired a number of
key PhARMA committees. Mr. Freiman is also an advisor to Burrill & Co., a San
Francisco merchant bank.
JULIUS R. KREVANS, M.D. has served on the Company's Board of Directors since
March 1995. Dr. Krevans has been Chancellor Emeritus and Director of
International Medical Care at University of California at San Francisco since
1993. From 1982 until 1993, Dr. Krevans served as Chancellor at UCSF, and was
Dean of the School of Medicine at UCSF from 1971 until 1982. Prior to this,
Dr. Krevans served as Dean for Academic Affairs at John Hopkins University
School of Medicine where he also served on the
35
faculty for 18 years and was Professor of Medicine from 1968 until 1971. He is
also a director of Neoprobe. Dr. Krevans served as a director of Parnassus
Pharmaceuticals Incorporated, which was liquidated under Chapter 7 of the
Federal Bankruptcy Code in 1995. Dr. Krevans received his M.D. from New York
University, College of Medicine and completed a residency in Medicine at John
Hopkins University School of Medicine.
MARK NOVITCH, M.D. has served on the Company's Board of Directors since
September 1995. Dr. Novitch was a Professor of Health Care Sciences at George
Washington University from October 1994 to June 1997. He is presently an Adjunct
Professor at George Washington University Medical Center. Since 1993,
Dr. Novitch has also been a private consultant in the pharmaceutical industry.
From 1985 until 1993, he served in senior executive positions with the Upjohn
Company, a medical products company, including Vice Chairman of the Board of
Directors, Corporate Executive Vice President, Corporate Senior Vice President
for Scientific Administration and Corporate Vice President. Prior to this, for
14 years, Dr. Novitch served with the FDA where from 1983 until 1984 he was
Acting Commissioner. For seven years, Dr. Novitch was on the faculty at Harvard
Medical School. He is Chairman of the Board of Directors of Alkon, Inc. and is
also a member of the Board of Directors of Neurogen Corporation, Guidant
Corporation, Kos Pharmaceutical, and Alteon, Inc. Dr. Novitch received his A.B.
from Yale University, and his M.D. from the New York Medical College.
ZAFAR RANDAWA, PH.D. has served on the Company's Board of Directors since
December 1996. Dr. Randawa is currently the Director of the New Technology
Evaluation Division of Otsuka America Pharmaceutical, Inc. and has served in
this capacity since September 1995. From 1989 until September 1995, Dr. Randawa
served as a Chief Scientist at Otsuka America Pharmaceutical, Inc. Dr. Randawa
received his Ph.D. in Biochemistry at Oregon Health Sciences University, his
Master of Science degree in Biochemistry at Karachi University in Karachi,
Pakistan, his B.S. in Biochemistry from Karachi University and his B.S. in
Chemistry from Panjab University in Lahore, Pakistan.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors, and persons who own more than 10% of a registered
class of the Company's equity securities, to file report of ownership on Form 3
and changes in ownership on Form 4 or 5 with the Securities and Exchange
Commission and the National Association of Securities Dealers. Such officers,
directors and ten percent stockholders are also required by the Securities and
Exchange Commission rules to furnish the Company with copies of all Section
16(a) forms that they file.
The Company believes that during fiscal year 1999, all the Reporting Persons
complied with all applicable filing requirements subject to the following
exceptions: Mr. Collins had one late filing of a report on Form 5 with respect
to a stock option grant.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
The Company's directors are reimbursed for their out-of-pocket travel
expenses associated with their attendance at Board meetings. Under the Company's
1995 Director Option Plan, non-employee directors of the Company are eligible to
receive grants of options to purchase shares of Common Stock. In addition, all
outside directors receive $5,000 per year in consideration of their membership
on the Board of Directors.
The Company's Board of Directors adopted the Director Option Plan in
December 1995 and the stockholders approved it in 1996. It was amended at the
Company's November 1999 Annual Stockholder's Meeting. Under the Director Option
Plan, the Company has reserved 350,000 shares of common stock for issuance to
the directors of the Company pursuant to nonstatutory stock options. The
Company's Board of
36
Directors determines the number of shares of the Company's stock that will be
granted each year to newly-elected and re-elected directors, provided that the
number of options for each newly-elected director in any given year will be the
same for each such director and the number of options for each re-elected
director in any given year will be the same for each such director. Options may
be granted under this plan to non-employee directors or directors who also serve
as consultants of the Company. Each option granted under the Director Option
Plan shall be exercisable at 100% of the fair market value of the Company's
common stock on the date such option was granted. Each grant under the plan will
vest monthly over the twelve month period commencing with the director's date of
election or re-election, provided that the option will become vested and fully
exercisable on the date of the next annual meeting of stockholders if such
meeting occurs less than one year after the date of the grant. The plan shall be
in effect for a term of ten years unless sooner terminated under the Director
Option Plan.
There were 140,000 Common Stock options granted in 1999 under the Director
Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded or paid by the
Company during the years ended December 31, 1999, 1998 and 1997 to its Chief
Executive Officer and each of the other executive officers of the Company
(collectively, the "Named Executive Officers"). The compensation table excludes
other compensation in the form of perquisites and other personal benefits that
constitute the lesser of $50,000 or 10% of the total salary and bonus earned by
each of the named Executive Officers in each fiscal year.
37
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
UNDERLYING OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) GRANTED (1) COMPENSATION ($)
- --------------------------- -------- ---------- --------- ------------------ ----------------
David E. Collins(2).................. 1999 26,500(3) 0 170,000(4) 7,083(5)
Chief Executive Officer and Vice- 1998 0 0 3,000(6) 5,000(7)
Chairman of the Board of Directors 1997 0 0 53,000(8) 5,000(7)
Nancy E. Katz(9)..................... 1999 42,308 0 450,000 0
President,Chief Operating Officer,
Chief Financial Officer and Member
of the Board of Directors
Howard B. Urnovitz................... 1999 152,000 500 0
Chief Science Officer and Member of 1998 157,846(10) 432 250,000(11)
the Board of Directors 1997 87,692 0 150,000(12)
William A. Boeger(13)................ 1999 222,354(14) 0 20,000(6) 135,979(15)
Chairman of the Board of Directors 1998 210,000(16) 74,686(17) 600,000(11) 25,881(18)
and former President and Chief 1997 50,000(19) 5,385(20) 195,000(12) 15,470(21)
Executive Officer
John J. DiPietro(22)................. 1999 148,116 40,000 20,000(6) 77,517(23)
Member of the Board of Directors 1998 144,911 432 300,000(11) 25,496(24)
and former Chief Operating Officer, 1997 131,250 0 80,000(12) 36,073(24)
Chief Financial Officer, Vice
President of Finance and Secretary
- ------------------------
(1) All figures in this column represent options to purchase the Company's
common stock.
(2) Mr. Collins was elected Chief Executive Officer in October 1999. He has
served as Vice Chairman of the Board of Directors since December 1997 and
as member of the Board of Directors since December 1995.
(3) Represents $26,500 paid pursuant to the Consulting Agreement between Mr.
Collins and the Company.
(4) Reflects option grant for 150,000 shares under the terms of the October
1999 Consulting Agreement between Mr. Collins and the Company and an option
grant for 20,000 shares pursuant to service as a Director of the Company.
(5) Represents $7,083 in Director's fees for services rendered in 1998 and
1999.
(6) Option grant made pursuant to service as a Director of the Company.
(7) Represents Directors fees.
(8) Represents option grant for 3,000 shares pursuant to service as a Director
of the Company and option grant for 50,000 shares pursuant to Consulting
Agreement between Mr. Collins and the Company. The latter 50,000 share
grant was cancelled as of October 1999.
38
(9) Ms. Katz joined the Company in October 1999 as President, Chief Operating
Officer, and Chief Financial Officer.
(10) $5,846 was paid to Dr. Urnovitz in 1998 for services rendered in 1997.
(11) Option grant was made upon cancellation of certain options previously
granted.
(12) These options were cancelled in October of 1998.
(13) Mr. Boeger served as the Company's Chairman of the Board of Directors from
September 1995 to December 1997. From December 1997 to October 1999, he
served as Chairman of the Board of Directors, Chief Executive Officer and
President. Since October 1999, Mr. Boeger has served as Chairman of the
Board of Directors.
(14) Represents $186,346 in salary and $36,008 paid pursuant to the terms of the
October 1999 Consulting Agreement between Mr. Boeger and the Company, of
which $5,000 represents payment for services to be rendered by Mr. Boeger
in 2000.
(15) Represents $112,500 in severance payments; $19,429 in living expenses and
$4,050 in car allowance.
(16) $15,000 was paid to Mr. Boeger in 1998 for services rendered by Mr. Boeger
in 1997.
(17) Represents $74,290 for non-cash bonus related to forgiveness of a portion
of a $70,000 note receivable including interest from Mr. Boeger and a $396
cash bonus.
(18) Represents $20,406 in living expenses and $5,475 in car allowance, $75 of
which relates to a 1997 car allowance.
(19) Represents amounts paid to an affiliate of Quest Ventures, a venture
capital partnership of which Mr. Boeger is Managing General Partner.
(20) Represents non-cash bonus related to forgiveness of a portion of a $70,000
note receivable including interest from Mr. Boeger.
(21) Represents $10,595 for living expenses and $4,875 for car allowance.
(22) Mr. DiPietro joined the Company in October 1995 as Chief Financial Officer
and Vice President of Finance. From December 1997 to September 1999,
Mr. DiPietro was Chief Operating Officer, Chief Financial Officer and Vice
President of Finance. Since October 1999, Mr. DiPietro has served as a
member of the Board of Directors.
(23) Represents $55,000 in severance payment; $17,898 in living expenses and
$4,619 car allowance.
(24) Represents living expenses.
39
The following table sets forth information concerning stock options granted
to the Named Executive Officers during the fiscal year ended December 31, 1999:
STOCK OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR(1) ($/SH)(2) DATE 5% ($) 10% ($)
- ---- ---------- -------------- --------- ---------- --------- ---------
David E. Collins................. 150,000(4) 13.16% 0.7812 10/18/09 73,694 186,755
20,000(5) 1.75% 1.5625 11/18/09 19,653 49,804
Nancy E. Katz.................... 450,000(6) 39.47% 0.7812 10/18/09 221,082 560,264
Howard B. Urnovitz............... 0 N/A N/A N/A N/A N/A
William A. Boeger................ 20,000(5) 1.75% 1.5625 11/18/09 19,653 49,804
John J. DiPietro................. 20,000(5) 1.75% 1.5625 11/18/09 19,653 49,804
- ------------------------
(1) Based on the aggregate of 1,080,000 options granted under the Company's
Incentive Stock Plan to employees and consultants to the Company and 60,000
options granted to Consultant Directors under the Company's 1995 Director
Option Plan during the year ended December 31, 1999, including the Named
Executive Officers.
(2) The exercise price was based on the closing price of the stock on the date
of grant on the NASDAQ Smallcap Market.
(3) The assumed 5% and 10% compound rates of annual stock appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future common stock
prices. Assuming a ten-year option term, annual compounding results in total
appreciation of 62.9% (at 5% per year) and 159.4% (at 10% per year).
(4) Represents option grant for 150,000 shares pursuant to Consulting Agreement
between Mr. Collins and the Company. Options for 50,000 shares were
immediately exercisable upon the grant date, October 18, 1999. Options for
an additional 50,000 shares become exercisable on April 18, 2000, and
options for the remaining 50,000 shares become exercisable on October 18,
2000. The options expire ten years from the date of grant.
(5) Options granted under the Director Option Plan become exercisable at the
rate of 1,667 shares per month beginning December 18, 1999, continuing at
that rate on each monthly anniversary thereafter through the earlier of
November 18, 2000, or the date of the next stockholders' meeting, at which
time all unvested options will vest. The options expire ten years from the
date of grant. The grant was made pursuant to service as a Director of the
Company.
(6) Options for 150,000 shares were immediately exercisable on the grant date,
October 18, 1999. Options for an additional 150,000 shares become
exercisable on the first anniversary of the grant date and options on the
remaining 150,000 shares become exercisable on the second anniversary of the
grant date. The options expire ten years from the date of grant, or earlier
upon termination of employment. The grant was made pursuant to the
Employment Agreement between Ms. Katz and the Company.
40
The following table sets forth information concerning option exercises for
the year ended December 31, 1999, with respect to each of the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN 1999
AND DECEMBER 31, 1999 OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISABLE VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS AT FISCAL MONEY OPTIONS AT FISCAL
ACQUIRED ON VALUE YEAR END (#) YEAR END ($)
NAME EXERCISE (#) REALIZED ($) (EXERCISABLE/UNEXERCISABLE)(1) (EXERCISABLE/UNEXERCISABLE)(1)(2)
- ---- ------------- ------------ ------------------------------ ---------------------------------
David E. Collins..... -- -- 58,000/100,000 33,375/62,500
Nancy E. Katz........ -- -- 150,000/300,000 93,750/187,500
Howard B. Urnovitz... -- -- 261,834/104,166 164,357/42,312
William A. Boeger.... -- -- 500,000/290,000 298,000/117,798
John J. DiPietro..... -- -- 184,500/150,500 74,944/61,133
- ------------------------
(1) Reflects in-the-money options granted under both the 1991 Incentive Stock
Plan and the 1995 Director Option Plan.
(2) Value realized and value of unexercised in-the-money options is based on a
value of $1.4062 per share of the Company's Common Stock, the closing price
on December 31, 1999 as quoted on the NASDAQ Smallcap Market. Amounts
reflect such fair market value minus the exercise price multiplied by the
number of shares to be acquired on exercise and do not indicate that the
optionee actually sold such stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of Mr. Freiman, Dr. Krevans
and Dr. Novitch. Mr. Collins was a member of the Compensation Committee until
his election as Chief Executive Officer in October 1999.
In October 1999, the Company entered into a consulting agreement with
David E. Collins, Vice-Chairman of the Board of Directors, to serve as Chief
Executive Officer effective from October 1999 through October 2000. Under the
terms of the agreement, Mr. Collins receives compensation of $1,000 for each day
devoted to the Company's business and was granted options to purchase 150,000
shares of the Company's stock. In turn, Mr. Collins commits to spending at least
of five days per month on Company business.
EMPLOYMENT AGREEMENTS
In October 1999, the Company entered into an employment agreement with Nancy
E. Katz as the President, Chief Operating Officer, and Chief Financial Officer
of the Company, which provides for an annual salary of $220,000. In addition,
Ms. Katz was granted 450,000 stock options, 150,000 of which vested immediately
and the balance of which vest over 24 months. Ms. Katz is also entitled to a
bonus upon the achievement of milestones mutually agreed to by the officer and
the Board of Directors. In the event Ms. Katz' employment is terminated by the
Company other than for cause, she will receive her base salary for twelve
months. In the event of a change in control, any unvested stock options will
become fully vested.
In January 1995, the Company entered into an employment agreement with
Dr. Howard B. Urnovitz, as the Founder, Director and Chief Science Officer of
the Company for the year ended December 31, 1995, which provided for an annual
salary of $140,000 plus an annual bonus not to exceed $35,000 per year.
41
The agreement was amended in November 1999 to provide payment of Dr. Urnovitz'
base salary through April 2000, if he is terminated other than for cause prior
to such date.
In October 1998, the Company entered into an employment agreement with
William A. Boeger for a term effective immediately through December 31, 1999,
which provides for an annual salary of $225,000. In addition, Mr. Boeger was
granted 600,000 stock options, which vest over 24 months. Mr. Boeger was
entitled to a car allowance of $450 per month, 25% bonus upon the achievement of
milestones mutually agreed to by Mr. Boeger and the Board of Directors,
temporary housing, and travel between his home and the Company. In the event
Mr. Boeger's employment would have been terminated by the Company other than for
cause, he would have received his base salary for twelve months and all stock
options that would have vested during the 12 month period following termination
would have become vested. Additionally, if Mr. Boeger voluntarily terminated his
employment after July 1, 1999, he would have been entitled to receive severance
pay equal to six months of his base salary.
Concurrent with his October 1999 resignation as President and Chief
Executive Officer, the Company entered into a consulting agreement with William
Boeger effective from October 1999 through October 2000. Under the terms of the
agreement, Mr. Boeger received $26,008, as compensation for services in
October and November 1999, and is entitled to compensation of $5,000 per month
for the period December 1999 through October 2000. Additionally, Mr. Boeger's
stock option granted pursuant to his 1998 employment agreement continues to vest
at a rate of 5,000 shares per month from October 1999 through October 2000.
In October 1998, the Company entered into an employment agreement with John
DiPietro for a term effective immediately through December 31, 1999, which
provided for an annual salary of $170,000. In addition, Mr. DiPietro was granted
300,000 stock options, which vest over 24 months. Mr. DiPietro was also entitled
to a car allowance of $350 per month, 25% bonus under the Company's bonus plan,
reimbursement for the cost of a corporate apartment, which expenses were
increased sufficiently to reimburse for taxes owed on such expenses, and certain
change in control provisions. In the event Mr. DiPietro's employment would have
been terminated by the Company other than for cause, he would have received his
base salary for twelve months and all stock options that would have vested
during the term of this agreement would have become fully vested. Additionally,
if Mr. DiPietro voluntarily terminated his employment after July 1, 1999, he
would be entitled to receive severance pay equal to six months of his base
salary.
Concurrent with his September 1999 resignation as Chief Operating Officer
and Chief Financial Officer of the Company, the Company entered into a
consulting agreement with John DiPietro effective from September 1999 through
September 2000. Under the terms of the agreement, Mr. DiPietro receives no cash
compensation, however, his stock option granted pursuant to his 1998 employment
agreement continues to vest at the rate of 4,000 shares per month from
September 1999 through September 2000. Under the terms of the consulting
agreement, severance payments payable to Mr. DiPietro pursuant to the 1998
employment contract were fixed at $55,000.
In October 1999, the Company entered into a consulting agreement with David
Collins to serve as Chief Executive Officer. See "Compensation Committee
Interlocks."
42
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Except as set forth in the footnotes to this table, the following table sets
forth information known to the Company with respect to the beneficial ownership
of its Common Stock as of March 15, 2000 for (i) all persons known by the
Company to own beneficially more than 5% of its outstanding Common Stock,
(ii) each of the Company's directors, (iii) each Named Executive Officer and
(iv) all directors and executive officers of the Company as a group.
SHARES
BENEFICIALLY % OF
5% STOCKHOLDERS, DIRECTORS AND OFFICERS(1) OWNED TOTAL
- ------------------------------------------ ------------ --------
Trilobite Lakes Corp.(2) ................................... 2,051,220(3) 9.99%
Silverside Carr Executive Center, Suite 14
501 Silverside Road
Wilmington, DE 19809
H&Q Healthcare Investors(4) ................................ 1,433,993 6.98%
50 Rowes Wharf-4th Floor
Boston, MA 02110
Otsuka Pharmaceutical Co., Ltd.(5) ......................... 1,310,480 6.38%
463-10 Kagsuno
Kawauchi-cho
Tokoshima Japan
Zafar Randawa, Ph.D.(6)..................................... 1,310,480 6.38%
William A. Boeger(7)........................................ 1,061,655 5.03%
David E. Collins(8)......................................... 112,584 *
Nancy E. Katz(9)............................................ 150,000 *
Howard B. Urnovitz, Ph.D.(10)............................... 443,701 2.13%
John DiPietro(11)........................................... 216,181 1.04%
Mark Novitch, M.D.(12)...................................... 44,833 *
Paul Freiman(13)............................................ 17,333 *
Julius Krevans, M.D.(14).................................... 29,833 *
All directors and executive officers as a group (9 3,386,600 15.68%
persons)..................................................
- ------------------------
* Represents beneficial ownership of less than 1%.
(1) To the Company's knowledge, except as set forth in the footnotes to this
table and subject to applicable community property laws, each person named
in this table has sole voting and investment power with respect to the
shares set forth opposite such person's name. Except as otherwise indicated,
the address of each of the persons in this table is as follows: c/o Calypte
Biomedical Corporation, 1265 Harbor Bay Parkway, Alameda, California 94502.
(2) This information was obtained from the Form 13D filing of Claneil
Enterprises, Inc., an affiliate of Trilobite, dated March 14, 2000.
David E. Collins, the Chief Executive Officer and Vice Chairman of the Board
of Calypte serves on the Board of Directors of Claneil Enterprises, Inc. and
is a member of Claneil's Compensation Committee.
(3) 1,951,220 shares are issuable pursuant to the private placement of shares
of the Company in March 2000 and 100,000 shares are issuable pursuant to a
warrant for the purchase of common stock. See "Liquidity and Capital
Resources--Subsequent Events."
(4) This information was obtained from the Form 13G/A filing of the entity
dated February 22, 2000.
(5) Includes 17,333 shares subject to options exercisable within 60 days.
43
(6) Includes 17,333 shares subject to options exercisable within 60 days.
Dr. Randawa is a director of the Company and an affiliate of Otsuka
Pharmaceutical Co., Ltd. All shares listed are held by Otsuka. Dr. Randawa
disclaims beneficial ownership of the shares except to the extent of his
affiliation with Otsuka.
(7) Includes 67,303 shares subject to options exercisable within 60 days owned
by entities affiliated with Quest Ventures LP of which Mr. Boeger is a
partner. Mr. Boeger disclaims beneficial ownership of all shares held by
Quest Ventures except to the extent of his actual pecuniary ownership. Also
includes 528,334 shares subject to options exercisable within 60 days owned
by Mr. Boeger.
(8) Includes 72,584 shares subject to options exercisable within 60 days.
(9) Includes 150,000 shares subject to options exercisable within 60 days.
(10) Includes 303,501 shares subject to warrants exercisable within 60 days.
(11) Includes 208,833 shares subject to options exercisable within 60 days.
(12) Includes 40,833 shares subject to options exercisable within 60 days.
(13) Includes 17,333 shares subject to options exercisable within 60 days.
(14) Includes 18,333 shares subject to options exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997, in recognition of a Technology Rights Agreement entered into
between the Company and Dr. Urnovitz, the Company partially funded the expenses
of the Chronic Illness Research Foundation, a research foundation started by
Dr. Urnovitz with which Mr. Boeger is also affiliated. The Company entered into
a loan agreement with Dr. Urnovitz to repay such funding to the Company and to
limit the funding to a maximum of $165,000. The loan is evidenced by a
promissory note and is secured by Dr. Urnovitz's stock options to purchase
common stock with a market value of 200% of the outstanding loan balance. The
interest on the outstanding principal balance of the loan is a variable rate of
the prime rate plus 1%. The principal amount and all accrued interest was
originally due on December 1, 1997 but was extended through December 31, 1999.
The Company's Board of Directors has subsequently extended the due date of the
note to June 12, 2000. The Technology Rights Agreement gives the Company the
first right of refusal for ten years of an exclusive, worldwide license to
practice, make or have made, use, sell, distribute and license to others any
invention or discovery related to urine-based diagnostics made by Dr. Urnovitz
in exchange for a one-time cash payment and the payment of royalties.
The note from Dr. Urnovitz is a full recourse obligation. It is secured by
Dr. Urnovitz's stock and vested employee options in the Company, and requires
maintenance of a collateral value of 200% of the loan value. This maintenance
covenant was not met at all times during 1998 and 1999. However, at all times
Calypte had the ability to reach Dr. Urnovitz's personal assets which Calypte
believed were adequate to provide for payment of the loan. Calypte has also
taken a security interest in additional collateral.
In 1997, the Company paid Pepgen, a minority-owned affiliate of the Company
$72,000 for an exclusive license to all technology that relates to urine-based
diagnostics developed by Pepgen. Mr. Boeger is a board member of Pepgen.
Dr. Urnovitz is the Science Officer of Pepgen.
In January 1998, Calypte loaned Pepgen $250,000 at an interest rate of 10%.
The loan is secured by all intellectual property of Pepgen and was due on
March 31, 1998. The due date was initially extended to May 15, 1998. During
June 1998, the loan was increased to $300,000 under the same terms of the
initial loan agreement and subsequent to June 1998, the due date was extended to
December 31, 1998. In August 1998, the loan was increased to $383,000 under the
same terms of the initial loan agreement. During the third quarter of 1998, the
Company loaned Pepgen Corporation an additional $468,000 under the same terms of
the initial note and extension, increasing the total amount due from Pepgen to
$768,000.
44
The loan was further collateralized by a personal guaranty by the Founder and
Chairman of Pepgen and a standby guaranty from Pepgen's President in the event
that the guaranty by the Founder and Chairman proves insufficient. During the
third quarter of 1998, the due date was extended to July 1, 1999.
In May 1999, Pepgen received a financing offer from a third party that was
contingent upon Calypte converting its note receivable due from Pepgen into an
additional equity interest in Pepgen. At a meeting of the Calypte Board of
Directors, the Board agreed to the conversion. Consequently, effective
March 31, 1999, the Company wrote off its total investment in the note
receivable from Pepgen, including accrued interest, as research and development
costs. Additional amounts totaling $63,000 were spent on research and
development related to Pepgen during the second quarter of 1999. On October 6,
1999, Pepgen secured $3.8 million in a new round of financing. Following the
closing of the financing, Calypte now owns 38% of Pepgen.
SUBSEQUENT EVENT
In March 2000, Calypte agreed to sell 4,096,000 shares of Common Stock to
institutional investors in a private placement at $2.05 per share. 1,951,220 of
the shares were sold to Trilobite Lakes Corporation ("Trilobite"). Trilobite is
an affiliate of Claneil Enterprises, Inc. David Collins, the Chief Executive
Officer and Vice-Chairman of the Board of Calypte serves on the Board of
Directors of Claneil and is a member of Claneil's Compensation Committee.
Pursuant to the Common Stock Purchase Agreement dated March 2, 2000, a
representative designated by Trilobite will be elected to Calypte's Board of
Directors to serve until the 2000 annual stockholders meeting. The Calypte Board
will also nominate a representative selected by Trilobite for election to the
Calypte Board for so long as Trilobite holds one-half of the shares it acquired
through the Common Stock Purchase Agreement. In connection with the private
placement, Trilobite extended a $1 million line of credit to Calypte and Calypte
issued a warrant for the purchase of 100,000 shares of its common stock at $3.62
per share.
In March 2000, Calypte announced that William Boeger, its Chairman, and
Howard Urnovitz, its founder and Chief Scientific Officer, had established a
commercial company named Chronix Biomedical that will focus on novel ways to
detect aberrant genes in individuals with chronic diseases. Chronix will be
financed independently of Calypte and Calypte will not have an equity interest
in Chronix. Calypte will have a right of first refusal to license any
urine-based diagnostic tests that result from Dr. Urnovitz's work, as well as
from Chronix' research efforts, pursuant to Technology Rights Agreements which
Calypte has with Dr. Urnovitz and with Chronix. Such Technology Rights
Agreements expire on March 1, 2007 unless otherwise agreed in writing by Calypte
with the relevant licensor. Under such Technology Rights Agreements, Calypte
will have a period of time, after disclosure to Calypte by Dr. Urnovitz or
Chronix, as the case may be, of the relevant developed technology, to license
such technology on an exclusive, worldwide basis in perpetuity; in exchange for
a license fee equal to the direct cost of the relevant licensor in developing
such technology, plus a running royalty equal to 5% of Calypte's net sales of
products and services using such licensed technology. Both Mr. Boeger and Dr.
Urnovitz will maintain their current positions at Calypte.
45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Certain Documents Filed as Part of the Form 10-K
1. Financial Statements
2. Financial Statement Schedules
The following financial statement schedule of Calypte Biomedical Corporation
for the years ended December 31, 1999, 1998 and 1997 is filed as part of this
Report and should be read in conjunction with the Consolidated Financial
Statements of Calypte Biomedical Corporation.
SCHEDULE PAGES
- -------- --------
Report of KPMG LLP.......................................... S-1
II. Valuation and Qualifying Accounts....................... S-2
Other schedules not listed have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
3. Exhibits
2.1^^^ Asset Purchase Agreement, dated as of November 18, 1998,
between Calypte and Cambridge.
3.3* Bylaws of the Registrant, as currently in effect.
3.4** Restated Certificate of Incorporation of Calypte Biomedical
Corporation, a Delaware corporation, filed July 31, 1996.
4.1^^^^ Rights Agreement between the Registrant and ChaseMellon
Shareholders L.L.C. as Rights Agents dated December 15,
1998.
10.1* Form of Indemnification Agreement between the Company and
each of its directors and officers.
10.2* 1991 Incentive Stock Plan, as amended.
10.3* 1995 Director Option Plan, as amended.
10.4* 1995 Employee Stock Purchase Plan.
10.5* Lease Agreement between the Registrant and Charles A. Grant
and Mark Greenberg, dated as of November 30, 1990.
10.6* Second Lease Extension Agreement between Registrant and
Charles A. Grant and Mark Greenberg, dated as of May 14,
1991.
10.7* Lease Extension Agreement between Registrant and Charles A.
Grant and Mark Greenberg, dated as of February 5, 1992.
10.8* Lease Extension Agreement between Registrant and Charles A.
Grant and Mark Greenberg, dated as of April 15, 1993.
10.9* Standard Form Lease 1255-1275 Harbor Bay Parkway Harbor Bay
Business Park between Commercial Center Bank and the
Registrant, dated as of August 22, 1992.
10.12* Employment Agreement between the Registrant and Howard B.
Urnovitz, dated as of January 25, 1995.
10.15^* License Agreement between the Registrant and New York
University, dated as of August 13, 1993.
10.16* First Amendment to License Agreement between the Registrant
and New York University, dated as of January 11, 1995.
10.17* Second Amendment to License Agreement between the Registrant
and New York University, dated as of October 15, 1995.
46
10.18^* Third Amendment to License Agreement between the Registrant
and New York University, dated as of January 31, 1996.
10.19^* Research Agreement between the Registrant and New York
University, dated August 12, 1993.
10.20^* First Amendment to Research Agreement between the Registrant
and New York University, dated as of January 11, 1995.
10.21^* Sublicense Agreement between the Registrant and Cambridge
Biotech Corporation, dated as of March 31, 1992.
10.22^* Master Agreement between the Registrant and Cambridge
Biotech Corporation, dated as of April 12, 1996.
10.23^* Sub-License Agreement between the Registrant and Cambridge
Biotech Corporation, dated as of April 12, 1996.
10.24^* Agreement between the Registrant and Repligen Corporation,
dated as of March 8, 1993.
10.25^* Non-Exclusive License Agreement between the Registrant and
The Texas A&M University System, dated as of September 12,
1993.
10.27^* Distribution Agreement between the Registrant and Otsuka
Pharmaceutical Co., Ltd., dated as of August 7, 1994.
10.29^* Distribution Agreement between the Registrant and Travenol
Laboratories (Israel), Ltd., dated as of December 31, 1994.
10.33* Form of Option Agreement for Stockholders of Pepgen
Corporation, dated as of October 12, 1995.
10.35* Equipment Lease Agreement between the Registrant and Phoenix
Leasing, dated as of August 20, 1993.
10.36* Equipment Lease Agreement between the Registrant and Meier
Mitchell/GATX, dated as of August 20, 1993.
10.37** Lease Extension Agreement between the Registrant and
Charles A. Grant and Mark Greenberg, dated as of
February 3, 1997.
10.39** Equipment Lease Agreement between the Registrant and
MMC/GATX, dated September 30, 1996.
10.40^** Joint Venture Agreement between the Registrant and Trinity
Biotech plc
10.41*** Second Addendum to Lease between the Registrant and
Commercial Center Bank dated as of July 21, 1997.
10.42*** Lease extension agreement between the Registrant and
Charles A. Grant and Mark Greenberg, dated December 9, 1997.
10.45^^ Lease extension agreement between the Registrant and
Charles A. Grant and Mark Greenberg, dated April 25, 1998.
10.46**** Employment Agreement between the Registrant and William A.
Boeger dated as of October 28, 1998.
10.47**** Employment Agreement between the Registrant and John J.
DiPietro dated as of October 28, 1998.
10.48**** Guaranty made by Chih Ping Liu for the benefit of the
Registrant dated September 30, 1998.
10.49# Loan and Security Agreement between the Registrant and
Silicon Valley Bank, dated December 21, 1998
10.50# Lease Extension Agreement between the Registrant and
Charles A. Grant and Mark Greenberg, dated February 26, 1999
10.51## Non-Exclusive Patent and License Agreement between the
Registrant and Public Health Service, dated June 30, 1999
10.52## Distribution Agreement between the Registrant and
Carter-Wallace, Inc., dated as of September 9,1999
10.53## Letter Agreement between the Registrant and John J.
DiPietro, dated as of September 17, 1999
47
10.54## Consulting Agreement between the Registrant and John J.
DiPietro, dated as of September 17, 1999
10.55 Master Lease Agreement between Aquila
Biopharmaceuticals, Inc., Landlord, and Biomerieux
Vitek, Inc., Tenant, dated as of October 22, 1996
10.56 First Amendment to Lease between Aquila
Biopharmaceuticals, Inc. Landlord, and Biomerieux
Vitek, Inc., Tenant, dated October 2, 1997
10.57 Sublease Agreement between Registrant and Cambridge Biotech
Corporation, assignee of Biomerieux, Inc. dated as of
December 17, 1998
10.58 Sublease Agreement between Registrant and Cambridge Biotech
Corporation, sublessee of DynCorp, dated as of December 17,
1998
10.59 Lease Extension Agreement between the Registrant and
Charles A. Grant and Mark Greenberg, dated October 12, 1999
10.60 Consulting Agreement between the Registrant and William A.
Boeger dated as of October 18, 1999
10.61 Consulting Agreement between the Registrant and David
Collins dated as of October 18, 1999
10.62 Employment Agreement between the Registrant and Nancy E.
Katz, dated as of October 18, 1999
10.63 Letter of Intent re Modification of Distribution Agreement
between Registrant and Otsuka Pharmaceutical Co., Ltd. dated
as of December 10, 1998
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP, Independent Auditors.
24.1 Power of Attorney (see page II-1).
27.1 Financial Data Schedule.
- ------------------------
* Incorporated by reference from exhibits filed with the
Company's Registration Statement on Form S-1 (File
No. 333-04105) filed on May 20, 1996, as amended to
June 25, 1996, July 15, 1996 and July 26, 1996.
^ Confidential treatment has been granted as to certain
portions of this exhibit
** Incorporated by reference from exhibits filed with the
Company's Report on Form 10-K dated March 28, 1997
*** Incorporated by reference from exhibits filed with the
Company's Report on Form 10-K dated March 25, 1998
**** Incorporated by reference from an exhibit filed with the
Company's Report on Form 10-K dated March 25, 1999
^^ Incorporated by reference from an exhibit filed with the
Company's Report on Form 10-Q dated August 12, 1998
^^^ Incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated January 4, 1999
^^^^ Incorporated by reference from an exhibit filed with the
Company's Report on Form 8-K dated December 16, 1998
# Incorporated by reference from an exhibit filed with the
Company's Report on Form 10-Q dated May 15, 1999
## Incorporated by reference from an exhibit filed with the
Company's Report on Form 10-Q dated November 15, 1999
(b) Reports on Form 8-K
The Registrant filed a Report on Form 8-K on January 4, 1999 and an amended
Report on Form 8K/A on March 5, 1999 regarding the acquisition of certain assets
of Cambridge Biotech Corporation.
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-8
Notes to Consolidated Financial Statements.................. F-9
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Calypte Biomedical Corporation:
We have audited the accompanying consolidated balance sheets of Calypte
Biomedical Corporation and subsidiary (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Calypte
Biomedical Corporation and subsidiary as of December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity with
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations and has an accumulated deficit that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
San Francisco, California
March 9, 2000
F-2
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
-------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,652 $ 3,121
Securities available for sale............................. 503 650
Accounts receivable, net of allowance of $35 and $0 at
December 31, 1999 and 1998, respectively................ 583 157
Inventory................................................. 1,460 1,748
Notes receivable--officers and employees.................. 551 498
Note receivable--related party............................ -- 768
Prepaid expenses.......................................... 201 116
Stock subscription receivable............................. -- 450
Other current assets...................................... 110 100
-------- --------
Total current assets.................................... 6,060 7,608
Property and equipment, net................................. 1,543 1,783
Intangibles, net............................................ 42 346
Other assets................................................ 176 208
-------- --------
$ 7,821 $ 9,945
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,290 $ 1,147
Accrued expenses.......................................... 1,476 1,227
Note payable.............................................. 844 --
Capital lease obligations--current portion................ 90 290
Deferred revenue.......................................... 500 500
-------- --------
Total current liabilities............................... 4,200 3,164
Deferred rent obligation.................................... 25 31
Capital lease obligations--long-term portion................ 50 23
-------- --------
Total liabilities....................................... 4,275 3,218
-------- --------
Mandatorily redeemable Series A preferred stock, $0.001 par
value; no shares authorized at December 31, 1999 and 1998;
100,000 shares issued and outstanding at December 31,
1999 and 1998; aggregate redemption and liquidation value
of $1,000 plus cumulative dividends....................... 2,216 2,096
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized; no shares issued or outstanding............. -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized at December 31, 1999 and 1998; 20,425,403 and
13,870,453 shares issued and outstanding as of
December 31, 1999 and 1998, respectively................ 20 14
Common stock subscribed................................... -- 3
Additional paid-in capital................................ 68,226 61,476
Deferred compensation..................................... (135) (107)
Accumulated deficit....................................... (66,781) (56,755)
-------- --------
Total stockholders' equity.............................. 1,330 4,631
-------- --------
$ 7,821 $ 9,945
======== ========
See accompanying notes to consolidated financial statements.
F-3
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
Product sales............................................. $ 3,728 $ 951 $ 376
-------- ------- -------
Total revenue........................................... 3,728 951 376
-------- ------- -------
Operating expenses:
Product costs............................................. 4,721 1,912 2,305
Research and development.................................. 4,123 3,881 3,685
Selling, general and administrative....................... 5,081 3,925 2,317
-------- ------- -------
Total expenses.......................................... 13,925 9,718 8,307
-------- ------- -------
Loss from operations.................................. (10,197) (8,767) (7,931)
Interest income............................................. 353 424 350
Interest expense............................................ (182) (116) (211)
Other income................................................ 2 1 --
-------- ------- -------
Loss before income taxes.............................. (10,024) (8,458) (7,792)
Income taxes................................................ (2) (2) (2)
-------- ------- -------
Net loss.............................................. (10,026) (8,460) (7,794)
Less dividend on mandatorily redeemable Series A preferred
stock..................................................... (120) (120) (120)
-------- ------- -------
Net loss attributable to common stockholders................ $(10,146) $(8,580) $(7,914)
======== ======= =======
Net loss per share attributable to common stockholders
(basic and diluted)....................................... $ (0.52) $ (0.64) $ (0.72)
======== ======= =======
Weighted average shares used to compute net loss per share
attributable to common stockholders (basic and diluted)... 19,333 13,432 11,028
======== ======= =======
See accompanying notes to consolidated financial statements.
F-4
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM DECEMBER 31, 1996 THROUGH DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ADDITIONAL TOTAL
COMMON PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL COMPENSATION DEFICIT EQUITY
-------- ---------- ------------ ----------- -------------
Balances at December 31, 1996......... $10 $46,270 $(363) $(40,501) $ 5,416
Exercise of stock options for 117,437
shares of common stock.............. -- 60 -- -- 60
Net exercise of Series E convertible
warrant for 12,755 shares of common
stock............................... -- -- -- -- --
Issuance of 2,600,999 shares of common
stock through a Private Placement... 3 11,052 -- -- 11,055
Cost of issuance of common stock for
Private Placement (including
underwriters' fees)................. -- (824) -- -- (824)
Common stock of 8,089 shares issued
under the Employee Stock Purchase
Plan................................ -- 37 -- -- 37
Dividend requirements of mandatorily
redeemable Series A preferred
stock............................... -- (120) -- -- (120)
Compensation relating to granting of
stock options....................... -- 407 (407) -- --
Amortization of deferred
compensation........................ -- -- 239 -- 239
Deferred compensation reversed for
terminated personnel................ -- (35) 35 -- --
Net loss.............................. -- -- -- (7,794) (7,794)
--- ------- ----- -------- -------
Balances at December 31, 1997......... $13 $56,847 $(496) $(48,295) $ 8,069
=== ======= ===== ======== =======
See accompanying notes to consolidated financial statements.
(Continued)
F-5
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD FROM DECEMBER 31, 1996 THROUGH DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON ADDITIONAL TOTAL
COMMON STOCK PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK SUBSCRIBED CAPITAL COMPENSATION DEFICIT EQUITY
-------- ---------- ---------- ------------ ----------- -------------
Balances at December 31, 1997.......... $13 $-- $56,847 $(496) $(48,295) $ 8,069
Exercise of stock options for 265,787
shares of common stock............... -- -- 144 -- -- 144
Common stock of 5,885 shares issued
under the Employee Stock Purchase
Plan................................. -- -- 16 -- -- 16
Issuance of 400,000 shares of common
stock for purchase of certain assets
of Cambridge Biotech Corporation..... 1 -- 1,589 -- -- 1,590
Costs associated with purchase of
certain assets of Cambridge Biotech
Corporation.......................... -- -- (71) -- -- (71)
3,102,500 shares of common stock
subscribed through a Private
Placement............................ -- 3 3,099 -- -- 3,102
Cost of subscription of common stock
for a Private Placement.............. -- -- (30) -- -- (30)
Dividend requirements of mandatorily
redeemable Series A preferred
stock................................ -- -- (120) -- -- (120)
Compensation relating to granting of
stock options........................ -- -- 82 (82) -- --
Amortization of deferred
compensation......................... -- -- -- 360 -- 360
Deferred compensation reversed for
cancelled options.................... -- -- (80) 80 -- --
Compensation relating to acceleration
of stock option vesting
acceleration......................... -- -- -- 31 -- 31
Net loss............................... -- -- -- -- (8,460) (8,460)
--- --- ------- ----- -------- -------
Balances at December 31, 1998.......... $14 $ 3 $61,476 $(107) $(56,755) $ 4,631
=== === ======= ===== ======== =======
See accompanying notes to consolidated financial statements.
(Continued)
F-6
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
PERIOD FROM DECEMBER 31, 1996 THROUGH DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON ADDITIONAL TOTAL
COMMON STOCK PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
STOCK SUBSCRIBED CAPITAL COMPENSATION DEFICIT EQUITY
-------- ---------- ---------- ------------ ----------- -------------
Balances at December 31, 1998.......... $14 $ 3 $61,476 $(107) $(56,755) $ 4,631
Exercise of stock options for 44,532
shares of common stock............... -- -- 35 -- -- 35
Common stock of 9,918 shares issued
under the Employee Stock Purchase
Plan................................. -- -- 5 -- -- 5
Cost associated with purchase of
certain assets of Cambridge Biotech
Corporation.......................... -- -- (68) -- -- (68)
Issuance of 3,102,500 shares of common
stock subscribed through a private
placement............................ 3 (3) -- -- -- --
3,398,000 shares of common stock issued
through a Private Placement.......... 3 -- 7,642 -- -- 7,645
Cost of issuance of common stock for
Private Placements (including
underwriters' fees).................. -- -- (854) -- -- (854)
Dividend requirements of mandatorily
redeemable Series A preferred
stock................................ -- -- (120) -- -- (120)
Compensation relating to granting of
stock options........................ -- -- 110 (110) -- --
Amortization of deferred
compensation......................... -- -- -- 82 -- 82
Net loss............................... -- -- -- -- (10,026) (10,026)
--- --- ------- ----- -------- -------
Balances at December 31, 1999.......... $20 $-- $68,226 $(135) $(66,781) $ 1,330
=== === ======= ===== ======== =======
See accompanying notes to consolidated financial statements.
F-7
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities:
Net loss.................................................. $(10,026) $(8,460) $(7,794)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 622 536 637
Amortization of deferred compensation................... 82 391 239
Forgiveness of note receivable from officer............. -- 73 5
Write-off of note and interest to research and
development expense.................................... 890 -- --
Changes in operating assets and liabilities:
Accounts receivable................................... (426) (24) (109)
Inventory............................................. 581 (706) 44
Other current assets and prepaid expenses............. (133) (66) 20
Other assets.......................................... 32 20 37
Accounts payable, accrued expenses and deferred
revenue.............................................. 392 767 294)
Deferred rent obligation.............................. (6) (6) (18)
-------- ------- -------
Net cash used in operating activities............... (7,992) (7,475) (6,647)
-------- ------- -------
Cash flows from investing activities:
Purchase of equipment..................................... (370) (203) (95)
Notes receivable from officers and employees.............. (53) (332) (244)
Purchase of securities available for sale................. (1,454) (1,873) --
Sale of securities available for sale..................... 1,601 1,223 --
Loan to Pepgen............................................ -- (768) --
-------- ------- -------
Net cash used in investing activities............... (276) (1,953) (339)
-------- ------- -------
Cash flows from financing activities:
Proceeds from sale of stock............................... 7,682 160 11,152
Expenses paid related to sale of stock.................... (585) -- (824)
Proceeds from common stock subscribed..................... 450 2,652 --
Expenses related to subscription of common stock.......... (269) (30) --
Purchase of certain assets of Cambridge Biotech Corp...... -- (500) --
Expenses related to purchase of certain assets of
Cambridge Biotech Corp.................................. (68) (71) --
Principal payments on notes payable....................... (1,406) -- (1,000)
Principal payments on capital lease obligations........... (255) (482) (446)
Proceeds from notes payable............................... 2,250 -- 1,000
-------- ------- -------
Net cash provided by financing activities........... 7,799 1,729 9,882
-------- ------- -------
Net (decrease) increase in cash and cash equivalents........ (469) (7,699) 2,896
Cash and cash equivalents at beginning of period............ 3,121 10,820 7,924
-------- ------- -------
Cash and cash equivalents at end of period.................. $ 2,652 $ 3,121 $10,820
-------- ------- -------
Supplemental disclosure of cash flow activities:
Cash paid for interest.................................... $ 178 $ 116 $ 211
Cash paid for income taxes................................ 2 2 2
Supplemental disclosure of noncash activities:
Refinance of capital lease obligation..................... 82 -- --
Acquisition of equipment through obligations under capital
leases.................................................. -- 34 --
Dividend on mandatorily redeemable Series A preferred
stock................................................... 120 120 120
Deferred compensation attributable to stock grants........ 110 2 372
Purchase of certain assets of Cambridge Biotech
Corporation............................................. -- 1,590 --
Revaluation of acquisition of certain assets of Cambridge
Biotech Corporation..................................... 293 -- --
Conversion of common stock subscribed to common stock..... 3 -- --
See accompanying notes to consolidated financial statements.
F-8
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(1) THE COMPANY
Calypte Biomedical Corporation (the Company) was incorporated on
November 11, 1989. The Company's primary activities are to sell its FDA-approved
urine Human Immunodeficiency Virus Type I (HIV-1) enzyme immunoassay (EIA)
screening test, its FDA-approved urine and serum HIV-1 Western Blot supplemental
tests, perform research and development on new products and obtain FDA approval
for its urine-based diagnostic tests. Prior to March 31, 1998, Calypte was
considered a development stage enterprise. On June 1, 1998, the Company
announced that the FDA licensed the urine HIV-1 Western Blot test that confirms
the presence of antibodies to HIV-1 in urine samples. The new test is used on
samples that are repeatedly reactive in the Company's HIV-1 urine antibody
screening test. The new test completes the only available urine-based HIV-1 test
method. Accordingly, the Company ceased being a development stage enterprise.
In December 1998, Calypte acquired from Cambridge Biotech Corporation
certain assets relating to the Western Blot product line for certain infectious
diseases. The acquisition included the urine-based and serum-based HIV-1 Western
Blot products, as well as a supplemental test for Lyme Disease and Human
T-Lymphotropic Virus (HTLV).
The Company's marketing strategy is to use distributors, focused direct
selling and marketing partners to penetrate certain targeted domestic markets.
The Company plans to maintain a small direct sales force to sell the Company's
HIV-1 screening test and potential future products to laboratories serving the
life insurance markets. International and other U.S. markets will be addressed
utilizing diagnostic product distributors. To date, in countries that have an
approval process for diagnostic tests, the Company has received approval for the
sale of its product in Indonesia only. Several international approvals are
pending, and the Company will work collaboratively with its distributors to
obtain regulatory approval in order to market and promote the products in their
local markets.
The Company has incurred net losses of $10.0 million, $8.5 million, and $7.8
million, in 1999, 1998, and 1997, respectively. The accumulated deficit at
December 31, 1999 was $66.8 million. As discussed in Note 20, during the first
quarter of 2000 the Company signed definitive agreements for the sale of
4,096,000 shares of its common stock in a private placement that is expected to
result in proceeds of approximately $8.3 million. Although the Company believes
current cash plus the proceeds of the stock sale will be sufficient to meet its
operating expenses and capital requirements, the Company's future liquidity and
capital requirements will depend on numerous factors, including market
acceptance of its products, regulatory actions by the FDA and other
international regulatory bodies, intellectual property protection, and the
ability to raise additional capital in a timely manner. Management expects to be
able to raise additional capital, if necessary; however, the Company may not be
able to obtain additional financing on acceptable terms, or at all.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
operations of the Company and its wholly owned subsidiary, Calypte, Inc., and
Calypte Biomedical Company (the Company's predecessor entity). All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-9
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company accounts for its interest in Pepgen Corporation (Pepgen) under
the equity method (Note 13).
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of investments in money market accounts
and commercial paper with original maturities of three months or less.
SECURITIES AVAILABLE FOR SALE
At December 31, 1999, securities available for sale represent high grade
commercial paper maturing in less than one year. At December 31, 1999,
unrealized gains and losses were insignificant.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
using the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Machinery and equipment,
furniture and fixtures, and computer equipment are depreciated using the
straight-line method over the estimated useful lives of the assets, generally
four to seven years. Leasehold improvements and equipment under capital leases
are amortized or depreciated over the shorter of the remaining lease term or the
useful life of the improvement.
INTANGIBLES
Intangibles consists of tradenames and trademarks related to the acquisition
of certain assets from Cambridge Biotech Corporation (Note 3), and are carried
at cost less accumulated amortization which is calculated on a straight-line
basis over five years. Accumulated amortization at December 31, 1999 was
$14,000.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial assets and liabilities have carrying values which approximate
their fair values for all periods presented, except for related party financial
assets. The carrying amounts of cash equivalents approximate fair value because
of their short-term nature and because such amounts are invested in accounts
earning market rates of interest. The fair market values of the notes receivable
from officers and employees are not readily determinable due to their related
party nature. The carrying amounts of all other financial instruments
approximate fair value because of their short-term maturity.
REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment to customers and when
all requirements related to the shipments have occurred.
F-10
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED REVENUE
Deferred revenue is accrued on payments received from customers or
distributors in advance of product shipment and will be recognized as revenue
upon shipment of the related products or when all obligations related to the
revenue are fulfilled.
INCOME TAXES
The Company accounts for income taxes under the Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. SFAS No. 109
requires an asset and liability approach for the financial reporting of income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, establishes a fair-value method of accounting for
stock options and similar equity instruments. The fair-value method requires
compensation cost to be measured at the grant date based on the value of the
award, and is recognized over the service period. SFAS No. 123 allows companies
to either account for stock-based compensation to employees under the provisions
of SFAS No. 123 or under the provisions of Accounting Principles Board (APB)
Opinion No. 25 and its related interpretations. The Company accounts for its
stock-based compensation to employees in accordance with the provisions of APB
Opinion No. 25 and provides the pro forma disclosures required under SFAS
No. 123.
The Company has recorded deferred compensation for the difference if any,
between the exercise price and the deemed fair market value of the common stock
for financial reporting purposes of stock options granted to employees. The
compensation expense related to such grants is amortized over the vesting period
of the related stock options on a straight-line basis.
The Company accounts for equity instruments issued to nonemployees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
(EITF) Issue No. 96-18 ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic net loss per share is computed by dividing net loss attributable to
common stockholders by the weighted average number of shares of common stock
outstanding during the year. The computation of diluted earnings per common
share is similar to the computation of basic net loss per share attributable to
common stockholders, except that the denominator is increased for the assumed
conversion of convertible securities and the exercise of dilutive options using
the treasury stock method. The weighted average shares used in computing basic
and diluted net loss per share attributable to common stockholders were
F-11
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the same for the three years ended December 31, 1999, 1998 and 1997. Options and
warrants were excluded from the computation of loss per share as their effect is
antidilutive.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and cash equivalents,
trade accounts receivable and notes receivable. The Company has investment
policies that limit investments to short-term, low-risk investments.
Concentration of credit risk with respect to trade accounts receivable are
limited due to the fact that the Company sells its products primarily to
established distributors and laboratories. Concentrations of credit risk with
respect to notes receivable are limited due to the fact that the notes are
either fully collateralized or guaranteed.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES
Calypte purchases raw materials and components used in the manufacture of
its product from various suppliers and relies on single sources for certain)
components. Establishment of additional or replacement suppliers for these
components cannot be accomplished quickly. The Company has some single-source
components, and any delay or interruption in the supply of these components
could have a material adverse effect on us by significantly impairing our
ability to manufacture products in sufficient quantities, particularly as we
increase our manufacturing activities in support of commercial sales.
COMPREHENSIVE LOSS
The Company has no components of other comprehensive loss other than its net
loss, and, accordingly, its comprehensive loss is equivalent to our net loss for
all periods presented.
SEGMENT AND GEOGRAPHIC INFORMATION
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information," requires an enterprise to report segment information based on how
management internally evaluates the operating performance of its business units
(segments). Our operations are confined to one business segment: the development
and sale of HIV diagnostics.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 is effective for all fiscal years beginning after June 15, 1999. SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or
F-12
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 delays the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000. The Company does not expect that the adoption of
SFAS Nos. 133 will have a material impact on its consolidated financial
statements because the Company does not currently hold any derivative
instruments.
(3) ACQUISITIONS
On December 17, 1998, the Company acquired the assets relating to the
Western Blot product line for certain infectious diseases from Cambridge Biotech
Corporation for a total purchase price of $2,090,000. The consideration was
$500,000 in cash, 400,000 shares of Calypte common stock, 200,000 warrants for
Calypte common stock with an exercise price of $8.00 per share, 200,000 warrants
for Calypte common stock with an exercise price of $10.00 per share, and 200,000
warrants of Calypte common stock with an exercise price of $12.00 per share. The
warrants expire on December 17, 2001 and were valued at $440,000 using the
Black-Scholes option pricing model. In connection with the acquisition,
approximately $139,000 of acquisition-related expenses were incurred during 1998
and 1999.
The acquisition was accounted for using the purchase method of accounting.
The allocation of the purchase price was initially made using the estimated fair
values of the assets acquired which include values based on management
estimates. The allocation of the $2,090,000 purchase price at December 31, 1998
was as follows: inventory $881,000, property & equipment $860,000 and
intangibles $349,000. During the first quarter of 1999, management adjusted its
allocation of the estimated fair value. As a result, intangible assets were
reduced and inventory was increased by $293,000.
Results of operations of the Western Blot product line from Cambridge
Biotech Corporation are included in the Consolidated Statement of Operations
since the acquisition date. The following unaudited pro forma information has
been prepared assuming the Western Blot product line acquisition had taken place
on January 1, 1997 (in thousands, except per share data):
1998 1997
-------- --------
Product sales............................................... $ 4,184 $ 3,518
Total expenses.............................................. 14,975 14,147
Loss from operations........................................ (10,791) (10,629)
Net loss.................................................... $(10,484) $(10,492)
======== ========
Net loss attributable to common stockholders................ $(10,604) $(10,612)
======== ========
Net loss per share attributable to common stockholders...... $ (0.77) $ (0.93)
======== ========
F-13
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(4) INVENTORY
Inventory as of December 31, 1999 and 1998 consisted of the following:
1999 1998
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Raw materials............................................. $ 233 $ 300
Work-in-process........................................... 862 1,134
Finished goods............................................ 365 314
------ ------
Total inventory......................................... $1,460 $1,748
====== ======
(5) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1999 and 1998 consisted of the
following:
1999 1998
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Computer equipment........................................ $ 497 $ 452
Machinery and equipment................................... 3,046 2,756
Furniture and fixtures.................................... 264 257
Leasehold improvements.................................... 1,703 1,675
------- -------
5,510 5,140
Accumulated depreciation and amortization................. (3,967) (3,357)
------- -------
Property and equipment, net............................... $ 1,543 $ 1,783
======= =======
The Company recognized depreciation expense of $610,000, $533,000, and
$637,000, for the years ended December 1999, 1998 and 1997, respectively.
(6) ACCRUED EXPENSES
Accrued expenses as of December 31, 1999 and 1998 consisted of the
following:
1999 1998
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Accrued royalty payments.................................. $1,006 $ 521
Accrued bonus............................................. -- 188
Other..................................................... 470 518
------ ------
Total accrued expenses.................................. $1,476 $1,227
====== ======
(7) LINE OF CREDIT
In January 1999, the Company entered into a line of credit agreement with a
bank to borrow up to $2.0 million at an interest rate of prime plus 1 1/4%. At
December 31, 1999, the prime rate was 8.50%. The agreement requires the Company
to maintain certain financial covenants and comply with certain reporting and
other requirements. In addition, borrowings under the line of credit agreement
are secured by the Company's assets. In November 1999, the agreement was
modified to increase the line of credit by
F-14
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(7) LINE OF CREDIT (CONTINUED)
an additional $250,000, and to extend the repayment term through August 2000. In
January 2000, the agreement was modified to extend the repayment term to
August 2001.
(8) LEASE COMMITMENTS
CAPITAL LEASES
To date, the Company has obtained three equipment lease lines of credit
which aggregated $3.3 million and were collateralized by the related equipment
acquired with the borrowings. The Company's ability to draw additional funds on
these lease lines of credit has expired. Lease payments under the lines of
credit are based on the total delivered equipment cost multiplied by a monthly
rate factor of approximately 3.3%-3.5% (approximate effective interest rate of
18% per annum).
During 1993, the Company issued stock warrants for the purchase of 35,155
shares of the Company's common stock at exercise prices ranging from $5.00 to
$7.50 per share as partial consideration for obtaining two lease lines of
credit. These warrants expire in 2003.
During 1999, the Company exercised its option to renew one of the capital
leases for an additional three year term.
Equipment acquired under the lease lines of credit and included in property
and equipment as of December 31, 1999 and 1998 consisted of the following:
1999 1998
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Machinery and equipment................................... $ 1,632 $ 1,632
Other..................................................... 105 105
------- -------
1,737 1,737
Accumulated depreciation and amortization................. (1,665) (1,353)
------- -------
$ 72 $ 384
======= =======
Future minimum lease payments under capital leases as of December 31, 1999
were:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ----------------------- --------------
2000........................................................ $ 98
2001........................................................ 45
2002........................................................ 9
-----
151
Amount representing interest................................ (11)
-----
Present value of capital lease obligations.................. 140
Current portion of capital lease obligations................ (90)
-----
Capital lease obligations--long-term portion................ $ 50
=====
F-15
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
OPERATING LEASES
The Company leases office and manufacturing space in Berkeley and Alameda,
California, under two noncancelable operating leases. Under the Alameda lease
agreement, the Company is required to provide a security deposit in the form of
a letter of credit in the amount of $50,000, secured by a $50,000 certificate of
deposit which is included in other assets in the accompanying consolidated
balance sheets. The Company also leases space in Rockville, Maryland under two
operating subleases. Total rent expense under these leases was $1,262,000,
$581,000, and $541,000 for the years ended December 1999, 1998, and 1997,
respectively. Future minimum rental payments under all noncancelable operating
leases as of December 31, 1999 were:
YEAR ENDED DECEMBER 31, (IN THOUSANDS)
- ----------------------- --------------
2000........................................................ $1,101
2001........................................................ 380
2002........................................................ 377
2003........................................................ 330
2004........................................................ 8
Thereafter.................................................. --
------
Total....................................................... $2,196
======
(9) MANDATORILY REDEEMABLE PREFERRED STOCK
In February 1988, a Joint Venture was formed between Calypte, Inc. and CBC
Diagnostics, Inc. (CBC), formerly known as Purdue Frederick Diagnostics, Inc.
When the Company was incorporated, the Company issued common stock and
mandatorily redeemable Series A preferred stock in exchange for all the common
stock of Calypte, Inc. and all the interests of the venturers in the Joint
Venture. The Joint Venture's losses up to total capital contributions were
allocated to CBC, who reported the losses on its income tax return.
The Company has the option to voluntarily redeem all or a portion of the
mandatorily redeemable Series A preferred stock at any time that funds are
legally available. The Company is required to redeem all shares of mandatorily
redeemable Series A preferred stock within 60 days of any fiscal year-end in
which the Company attains $3,000,000 in retained earnings, and funds are legally
available. The mandatorily redeemable Series A preferred stock is nonvoting.
Holders of mandatorily redeemable Series A preferred stock shares are
entitled to receive cumulative dividends at the rate of $1.20 per share per
annum. Through December 31, 1999, cumulative preferred dividends totaling
$1,216,000 have been charged to stockholders' equity to accrete for the
mandatorily redeemable Series A preferred stock redemption value with a
corresponding increase in the recorded amount of the mandatorily redeemable
Series A preferred stock.
In anticipation of using a portion of the proceeds from its Initial Public
Offering to redeem the Series A preferred stock, the Company eliminated the
Series A preferred stock from its articles of incorporation upon
re-incorporation of the Company in Delaware in July 1996. However, management
subsequently chose not to redeem the Series A preferred stock and as of
December 31, 1999 it remains outstanding. The holders of such shares maintain
the same rights as held before the re-incorporation.
F-16
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(10) STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS
In October 1997, the Company completed a private placement of 2,600,999
shares of its common stock at $4.25 per share. The Company received proceeds of
$10.2 million after deducting placement agent commissions and additional
expenses associated with the private placement.
In January 1999, the Company completed an additional private placement of
3,102,500 shares of its common stock at $1.00 per share. The Company received
proceeds of approximately $3.1 million after deducting placement agent
commissions and additional expenses associated with the private placement.
In April 1999, the Company completed a private placement of 3,398,000 shares
of its common stock at $2.25 per share. The Company received net proceeds of
approximately $6.8 million after deducting agent commissions and additional
expenses associated with the private placement.
CHANGE OF CONTROL PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of preventing, discouraging or delaying any change in the
control of the Company and may maintain the incumbency of the Board of Directors
and management. The authorization of undesignated preferred stock makes it
possible for the Board of Directors to issue preferred stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company.
On December 15, 1998, the Board of Directors of Calypte declared a dividend
distribution of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock, par value $.001 of the Company. The dividend
was payable to the stockholders of record on January 5, 1999 with respect to
share of Common Stock issued thereafter until the Distribution Date (as defined
in a Rights Agreement) and, in certain circumstances, with respect to shares of
Common Stock issued after the Distribution Date. Except as set for in the Rights
Agreement, each Right, when it becomes exercisable, entitles the registered
holder to purchase from the Company one one-thousandth (1/1000th) of a share of
Series RP Preferred Stock of the Company, $.001 par value per share, at a price
of $15 per one one-thousandth (1/1000th) of a share of Preferred Stock, subject
to adjustment. The description and terms of the Rights are set forth in a Rights
Agreement between the Company and ChaseMellon Shareholder Services, L.L.C., as
Rights Agent, dated as of December 15, 1998.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on the Rights being redeemed or a substantial
number of Rights being acquired. However, the Rights should not interfere with
any tender offer or merger approved by the Company because the Rights do not
become exercisable in the event of a permitted offer or other acquisition
exempted by the Board.
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS
In April 1991, the Company's Board of Directors approved the adoption of the
Company's Incentive Stock Plan (the Stock Plan). A total of 4,240,992 shares of
common stock have been reserved for issuance under the Stock Plan.
Under the terms of the Stock Plan, nonstatutory stock options may be granted
to employees, including directors who are employees, and consultants. Incentive
stock options may be granted only to employees.
F-17
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
Nonstatutory stock options may be granted under the Stock Plan at a price
not less than 85% of the fair market value of the common stock on the date the
option is granted. Incentive stock options may be granted under the Stock Plan
at a price not less than 100% of the fair market value of the common stock on
the date the option is granted. Options granted under the Stock Plan generally
vest monthly over four to five years. The term of the nonstatutory and incentive
stock options granted is 10 years or less from the date of the grant, as
provided in the option agreements.
Incentive and nonstatutory stock options granted to employees and
consultants who, on the date of grant, own stock representing more than 10% of
the voting power of all classes of stock of the Company are granted at an
exercise price not less than 110% of the fair market value of the common stock.
Any options granted are exercisable at the time and under conditions as
determined by the Company's Board of Directors. The Board of Directors may amend
or modify the Stock Plan at any time. The Stock Plan will terminate in 2001,
unless sooner terminated by the Board of Directors.
Compensation is recorded related to options granted below fair market value,
if any, or options granted to non-employees. For the years ended December 31,
1999, 1998 and 1997, the Company has recorded deferred compensation of $110,000,
$82,000, and $407,000, respectively, for certain of the Company's common stock
options granted under the Stock Plan. This amount is being amortized over the
relevant period of benefits. For the years ended December 31, 1999, 1998, and
1997, $82,000, $391,000, and $239,000, respectively, were amortized.
The following table summarizes activity under the Stock Plan:
OPTIONS
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
- ------------------------------------------------------------ --------------
Outstanding as of December 31, 1996......................... 1,375,465 $0.88
Granted................................................... 699,599 4.05
Exercised................................................. (117,437) 0.51
Canceled.................................................. (128,051) 0.63
--------- -----
Outstanding as of December 31, 1997......................... 1,829,576 2.13
Granted................................................... 1,905,108 1.18
Exercised................................................. (265,787) 0.54
Canceled.................................................. (910,891) 3.51
--------- -----
Outstanding as of December 31, 1998......................... 2,558,006 1.09
Granted................................................... 1,080,000 1.07
Exercised................................................. (44,532) 0.80
Canceled.................................................. (401,834) 1.82
--------- -----
Outstanding as of December 31, 1999......................... 3,191,640 $0.99
========= =====
Exercisable as of December 31, 1997......................... 1,019,933 $1.39
========= =====
Exercisable as of December 31, 1998......................... 783,453 $1.09
========= =====
Exercisable as of December 31, 1999......................... 1,567,967 $0.90
========= =====
F-18
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
As of December 31, 1999, 481,615 shares of common stock were available for
grant under the Stock Plan. The per share weighted-average fair value of stock
options granted during 1999, 1998, and 1997 was $0.63, $0.92, and $3.36 on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1999--expected dividend yield 0.00%, risk free
interest rate of 6.03%, volatility of 80%, and an expected life of 3.6 years;
1998--expected dividend yield 0.0%, risk free interest rate of 4.5%, volatility
of 80%, and an expected life of 8 years; 1997--expected dividend yield 0.0%,
risk free interest rate of 6.0%, volatility of 80%, and an expected life of
9 years.
The following table summarizes information about stock options outstanding
under the Stock Plan at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVG NUMBER
OUTSTANDING REMAINING YEARS WEIGHTED-AVG EXERCISABLE WEIGHTED-AVG
RANGE OF EXERCISE PRICES AT 12/31/99 TO EXPIRATION EXERCISE PRICE AT 12/31/999 EXERCISE PRICE
- ------------------------ ----------- --------------- -------------- ------------ --------------
$0.50.................. 529,326 4.98 $0.50 528,503 $0.50
$0.78.................. 795,000 9.80 $0.78 200,032 $0.78
$1.00.................. 1,560,564 8.68 $1.00 807,126 $1.00
$1.19--$7.00........... 306,750 9.25 $2.36 32,306 $5.82
--------- ---------
$0.50--$7.00........... 3,191,640 8.40 $0.99 1,567,967 $0.90
========= =========
1995 DIRECTOR OPTION PLAN
In December 1995, the Company's Board of Directors approved the Company's
Director Option Plan (the Director Option Plan). Under the Director Option Plan,
the Company has reserved 350,000 shares of common stock for issuance to the
directors of the Company pursuant to nonstatutory stock options. Under the
Director Option Plan, the Company's Board of Directors determines the number of
shares of the Company's stock that will be granted each year to newly-elected
and re-elected directors, provided that the number of options for each
newly-elected director in any given year will be the same for each such director
and the number of options for each re-elected director in any given year will be
the same for each such director. Options may be granted under this plan to
non-employee directors or directors who also serve as consultants of the
Company. Each option granted under the Director Option Plan shall be exercisable
at 100% of the fair market value of the Company's common stock on the date such
option was granted. Each grant under the plan will vest monthly over the twelve
month period commencing with the director's date of election or re-election,
provided that the option will become vested and fully exercisable on the date of
the next annual meeting of stockholders if such meeting occurs less than one
year after the date of the grant. The plan shall be in effect for a term of ten
years unless sooner terminated under the Director Option Plan.
The Company has not recorded any deferred compensation for the Company's
common stock options granted under the Director Option Plan.
F-19
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
The following table summarizes activity under the Director Option Plan:
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
-------- --------------
Outstanding as of December 31, 1996......................... 40,000 $7.00
Granted................................................... 21,000 4.72
Exercised................................................. -- --
Canceled.................................................. (24,000) 7.00
------- -----
Outstanding as of December 31, 1997......................... 37,000 5.71
Granted................................................... 30,000 2.72
Exercised................................................. -- --
Canceled -- --
------- -----
Outstanding as of December 31, 1998......................... 67,000 4.37
Granted................................................... 140,000 1.56
Exercised................................................. -- --
Canceled.................................................. -- --
------- -----
Outstanding as of December 31, 1999......................... 207,000 $2.47
======= =====
Exercisable as of December 31, 1997......................... 6,250 $6.53
======= =====
Exercisable as of December 31, 1998......................... 26,000 $5.13
======= =====
Exercisable as of December 31, 1999......................... 59,669 $3.73
======= =====
As of December 31, 1999, 143,000 shares of common stock were available for
grant under the Director Option Plan. The per share weighted-average fair value
of stock options granted during 1999, 1998 and 1997 was $0.75, $2.72, and $4.01
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: 1999--expected dividend yield 0.0%, risk free interest
rate 6.00%, volatility of 80%, and an expected life of 2.2 years; 1998--expected
dividend yield 0.0%, risk free interest rate 5.0%, volatility of 80%, and
expected life of 10 years; 1997--expected dividend yield 0.0%, risk free
interest rate 5.9%, volatility of 80%, and an expected life of 10 years.
The following table summarizes information about stock options outstanding
under the Director Option Plan at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVG NUMBER
OUTSTANDING REMAINING YEARS WEIGHTED-AVG EXERCISABLE WEIGHTED-AVG
RANGE OF EXERCISE PRICES AT 12/31/99 TO EXPIRATION EXERCISE PRICE AT 12/31/999 EXERCISE PRICE
- ------------------------ ----------- --------------- -------------- ------------ --------------
$1.38.................. 15,000 8.82 $1.38 15,000 $1.38
$1.56.................. 140,000 9.88 $1.56 11,669 $1.56
$4.00--$5.69........... 36,000 8.13 $4.45 21,000 $4.74
$7.00.................. 16,000 6.97 $7.00 12,000 $7.00
--------- ---------
$1.38--$7.00........... 207,000 9.28 $2.47 59,669 $3.73
========= =========
F-20
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(11) INCENTIVE STOCK AND STOCK OPTIONS PLANS (CONTINUED)
1995 EMPLOYEE STOCK PURCHASE PLAN
In December 1995, the Company's Board of Directors approved the Company's
Employee Stock Purchase Plan (the Purchase Plan). The Purchase Plan is intended
to qualify under Section 423 of the Internal Revenue Code (the Code). The
Company has reserved 300,000 shares of common stock for issuance under the
Purchase Plan. Under the Purchase Plan, an eligible employee may purchase shares
of common stock from the Company through payroll deductions of up to 10% of his
or her compensation, at a price per share equal to 85% of the lower of (i) the
fair market value of the Company's common stock on the first day of an offering
period under the Purchase Plan or (ii) the fair market value of the common stock
on the last day of the six month purchase period during the offering period.
Except for the first offering period, each offering period will last for
twenty-four months; stock purchases take place every 6 months (April 30 and
October 31 of each year). The first period commenced on the first day of
trading, July 26, 1996. Any employee who is customarily employed for at least 20
hours per week and more than five months per calendar year, who has been
employed for at least three consecutive months on or before the commencement
date of an offering period is eligible to participate in the Purchase Plan. As
of December 31, 1999, 1998 and 1997, 27,535, 17,617, and 11,732 shares,
respectively, had been purchased under the Purchase Plan.
Under SFAS No. 123, compensation cost is recognized for the fair value of
the employees' purchase rights. No purchase rights were granted in 1997. The per
share weighted-average fair value of those purchase rights granted in 1999 and
1998 were $0.46 and $3.04, respectively on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
1999--expected dividend yield 0.0%, risk free interest rate of 5.1%, volatility
of 80%, and an expected life of 0.49 years; 1998--expected dividend yield 0.0%,
risk free interest rate of 5.6%, volatility of 80%, and an expected life of
2 years.
PRO FORMA DISCLOSURE
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options and purchase rights under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below for the years ended December 31:
1999 1998 1997
-------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
Net loss attributable to common
stockholders................................
As reported................................. $(10,146) $(8,580) $(7,914)
Pro forma................................... (11,057) (9,718) (8,851)
Net loss per share attributable to common
stockholders................................
As reported................................. $ (0.52) $ (0.64) $ (0.72)
Pro forma................................... (0.57) (0.72) (0.80)
Pro forma net loss reflects only options granted since 1995 as well as
purchase rights granted in 1999, 1998 and 1996. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts presented above because compensation
cost is reflected over the options' vesting period and compensation cost for
options granted prior to January 1, 1995 is not considered.
F-21
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(12) SECTION 401(k) PLAN
Effective January 1, 1995, the Company adopted a Retirement Savings and
Investment Plan (the 401(k) Plan) covering the Company's full-time employees
located in the United States. The 401(k) Plan is intended to qualify under
Section 401(k) of the Internal Revenue Code, so that contributions to the 401(k)
Plan by employees or by the Company, and the investment earnings thereon, are
not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed annual limit and to have the
amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan
permits, but does not require, additional matching contributions to the
401(k) Plan by the Company on behalf of all participants in the 401(k) Plan. The
Company has not made any contributions to the 401(k) Plan.
(13) INVESTMENT IN PEPGEN CORPORATION
During 1995, the Company purchased a 49% equity interest in Pepgen for $1.0
million paid at closing, $1.0 million payable to Pepgen pursuant to a promissory
note and options to purchase the Company's common stock valued at $500,000. The
options were granted to Pepgen's stockholders for the purchase of an aggregate
of 475,000 shares of the Company's common stock at a price of $7.50 per share,
of which 100,000 of such shares were immediately exercisable upon signing of the
agreement and the remaining 375,000 shares become exercisable upon attainment of
certain milestones. The Company valued the options utilizing the Black-Scholes
option-pricing model which considered the terms of the options, other market
assumptions consistent with those as determined by an independent valuation
appraiser, a volatility index for the biotechnology industry and certain other
factors related to the probability and timing of attaining related milestones.
The options expire at the earlier of September 2005 or three years after
becoming exercisable. In addition, Calypte has the right of first negotiation to
purchase the remaining portion of Pepgen at fair market value, and the Company
is entitled to elect two of the seven Board members of Pepgen. The Company paid
the $1.0 million promissory note during 1996. The Company may, but has no
obligation nor plans to, provide additional funding to Pepgen.
During 1996, the Company entered into an agreement with Pepgen to pay
$72,000 for an exclusive license to all technology that relates to urine-based
diagnostics developed by Pepgen. This agreement was renewed in 1997 for $60,000.
The Company did not subsequently renew this license.
During 1998, the Company loaned Pepgen $768,000 at an interest rate of 10%.
The loan was secured by all intellectual property of Pepgen as well as a
personal guaranty from Pepgen's Founder and Chairman and a standby guaranty from
Pepgen's President in the event that the guaranty by the Founder and Chairman
proved insufficient. The entire loan plus interest was due July 1, 1999.
In May 1999, Pepgen received a financing offer from a third party that was
contingent upon the Company converting its note receivable due from Pepgen into
an additional equity interest in Pepgen. At a meeting of the Company's Board of
Directors, the Board agreed to the conversion. Consequently, effective
March 31, 1999, the Company wrote off its total investment in the note
receivable from Pepgen, including accrued interest, as research and development
costs. Additional amounts totaling $63,000 were spent on research and
development related to Pepgen during 1999. On October 6, 1999, Pepgen secured
$3.8 million in a new round of financing. Following the closing of the
financing, the Company now owns 38% of Pepgen.
F-22
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(14) INCOME TAXES
The provision for income taxes for all periods presented in the accompanying
consolidated statements of operations represents minimum California franchise
taxes. Income tax expense differed from the amounts computed by applying the
U.S. federal income tax rate of 34% to pretax losses as a result of the
following:
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Computed "expected" tax expense........................... $(3,408) $(2,876) $(2,649)
Meals and entertainment expenses, and officer's life
insurance not deductible for income taxes............... 17 8 5
Research expenses......................................... 39 32 50
State tax expense......................................... 1 1 1
Losses and credits for which no benefits have been
recognized.............................................. 3,360 2,885 2,595
Stock option compensation................................. -- (48) --
Other..................................................... 5 -- --
------- ------- -------
$ 2 $ 2 $ 2
------- ------- -------
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets is presented below:
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Employee benefit reserves, including accrued vacation and
bonuses................................................. $ 41 $ 128
Start-up and other capitalization......................... 722 547
Fixed assets, due to differences in depreciation.......... 412 424
Deferred rent and revenue................................. 209 211
Net operating loss carryovers............................. 21,524 17,505
Research and development credits.......................... 1,320 1,164
Other operating reserves.................................. 210 146
Other..................................................... 237 164
-------- --------
Total gross deferred tax assets......................... 24,675 20,289
Valuation allowance......................................... (24,675) (20,289)
-------- --------
Net deferred tax asset.................................... $ -- $ --
======== ========
The net change in the valuation allowance for the years ended
December 1999, 1998 and 1997 was an increase of $4,386,000, $1,371,000, and
$3,906,000, respectively. Because there is uncertainty regarding the Company's
ability to realize its deferred tax assets, a 100% valuation allowance has been
established. When realized, approximately $171,000 of deferred tax assets will
be creditable to paid-in capital.
As of December 31, 1999, the Company had federal tax net operating loss
carryforwards of approximately $58,845,000, which will expire in the years 2004
through 2019. The Company also has federal
F-23
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998 AND 1997
(14) INCOME TAXES (CONTINUED)
research and development credit carryforwards as of December 31, 1999 of
approximately $1,003,000, which will expire in the years 2005 through 2019.
State tax net operating loss carryforwards were approximately $25,998,000
and state research and development credit carryforwards were $474,000 as of
December 31, 1999. The state net operating loss carryforwards will expire in the
years 2000 through 2004 and the state research and development credits will
carryforward indefinitely.
The Company's ability to utilize its net operating loss and research and
development tax credit carryforwards may be limited in the future if it is
determined that the Company experienced an ownership change, as defined in
Section 382 of the Internal Revenue Code.
(15) ROYALTY, LICENSE, AND RESEARCH AGREEMENTS
ROYALTY AND LICENSE AGREEMENTS
The Company has entered into an agreement that provides for royalty payments
to former related parties based on sales of certain products conceived by the
former related parties prior to March 30, 1989.
The Company has entered into arrangements with various organizations to
receive the right to utilize certain patents and proprietary rights under
licensing agreements in exchange for the Company making certain royalty payments
based on sales of certain products and services. The royalty obligations are
based on a percentage of net sales of licensed products and include minimum
annual royalty payments under some agreements.
RESEARCH AGREEMENT
As amended in 1994, the Company entered into a research agreement that
allowed for a university to perform certain research on behalf of the Company
for a seven-year period. Under the terms of the agreement, the Company may
negotiate certain license rights to the inventions made by the university
resulting from this research. The Company's annual payment under this agreement
is approximately $150,000 through 1999.
(16) DISTRIBUTION AGREEMENTS
WAMPOLE LABORATORIES
In September 1999, the Company appointed Wampole Laboratories, a division of
Carter-Wallace Inc., as its exclusive U.S. distributor to the hospital, public
health, and reference lab markets. The agreement has an initial five-year term
and on-going exclusivity within this term is predicated on the purchase of
minimum volumes of the Company's product.
OTSUKA PHARMACEUTICAL CO., LTD.
Otsuka is a Japanese integrated health care and consumer products
conglomerate. In an agreement first created in August 1994, and amended in
December 1998, the Company appointed Otsuka as its exclusive distributor for all
market segments in Japan. The agreement extends through 2004 and is terminable
without cause by Otsuka upon 120 days notice.
F-24
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(16) DISTRIBUTION AGREEMENTS (CONTINUED)
TEVA MEDICAL LTD (FORMERLY TRAVENOL LABORATORIES(ISRAEL) LTD.)
In December 1994 the Company entered into an agreement with TEVA Medical
Ltd. ("TEVA"), which gives TEVA exclusive rights to distribute the HIV-1 test
and to use the trademark "Calypte" within Israel. Under the agreement, TEVA will
undertake registration of the product in Israel with the Company paying
regulatory fees. The agreement has no fixed term and requires no minimum
purchase levels.
PACIFIC BUSINESS DEVELOPMENT, INC.
The Company appointed Pacific Business Development ("Pacific") as its
exclusive distributor for all market segments in South Korea in July 1999.
Pacific's business partner in Korea is Baecam Medical Co. Ltd. This agreement
has an initial three-year term. Continuing exclusivity during the term of the
agreement is predicated on the purchase of minimum volumes of product following
the product's successful registration in South Korea.
CHEMITECH INTERNATIONAL COMPANY
The Company appointed Chemitech International Company as its exclusive
distributor for all market segments in seven Middle Eastern countries in March
1999. The agreement is extendable year-by-year and on-going exclusivity is
predicated upon specified minimum purchases following successful local
registration of the product.
PROFESSIONAL BIOTECH PVT. LTD.
In March 1999, the Company appointed Professional Biotech Pvt. Ltd. as its
exclusive distributor for all market segments in India. The agreement's initial
term is eighteen months, extendable thereafter. Extension of the agreement and
on-going exclusivity are negotiable following successful local registration of
the product.
POS BIOLOGICAL ESPANA, S.L.
The Company appointed POS Biological Espana, S.L. as its exclusive
distributor for all market segments in Spain and Portugal in October 1999. This
agreement has an initial term of three years. Continuing exclusivity during the
term of the agreement is contingent upon specified minimum purchases following
successful local product registration.
UNI-HEALTH SERVICES SDN. BHD.
In October 1999, the Company appointed Uni-Health Services Sdn. Bhd. as its
exclusive distributor for all market segments in Malaysia. The distribution
agreement has an initial term of one year. Extension of the agreement and
continuing exclusivity are dependent upon the purchase of specified minimum
volumes of product following the product's successful local registration.
(17) CONSULTING AND EMPLOYEE AGREEMENTS
In January 1995, the Company entered into an employment agreement with an
officer for the year ended December 31, 1995, which provided for an annual
salary of $140,000 plus an annual bonus not to
F-25
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(17) CONSULTING AND EMPLOYEE AGREEMENTS (CONTINUED)
exceed $35,000 per year. The agreement was amended in November 1999 to provide
payment of the officer's base salary through April 2000, if he is terminated for
cause prior to such date.
In December 1997, the Company entered into a consulting agreement with a
Board member effective from December 1997 to June 1998. Under the agreement, the
consultant received compensation of $6,000 per month and was granted 50,000
stock options which vested over the period of the agreement. The options were
cancelled as of October 1999.
In December 1997, the Company entered into a consulting agreement with a
Board member effective from January 1998 through June 1998. Under the agreement,
the consultant received compensation of $2,500 per month and was granted 50,000
stock options which vested over a 36 month period with the possibility of
immediate vesting under certain conditions. The options were cancelled as of
October 1999.
In October 1998, the Company entered into employment agreements with two
officers. Those agreements expired upon the termination of employment and
execution of Consulting Agreements that extend from 1999 to 2000 between the
Company and each of the officers.
In October 1999, the Company entered into an employment agreement with an
officer and director of the Company that provides for an annual salary of
$220,000. In addition, the officer was granted 450,000 stock options, which vest
over 24 months. The officer is also entitled to a bonus upon the achievement of
milestones mutually agreed to by the officer and the Board of Directors. In the
event the officer's employment is terminated by the Company other than for
cause, the officer is entitled to receive her base salary for twelve months.
In October 1999, the Company entered into a consulting agreement with a
Board member to serve as an officer of the Company effective from October 1999
through October 2000. Under the terms of the agreement, the director receives
compensation of $5,000 per month and was granted options to purchase 150,000
shares of the Company's stock. The options for 50,000 shares of the Company's
stock vested immediately upon execution of the Agreement, an additional 50,000
shares vest after six months, and the remaining 50,000 shares vest on the one
year anniversary of the agreement.
The Company has entered into other employee and consulting agreements with
varying terms, in the ordinary course of business.
(18) RELATED PARTIES
In March 1992, the Company advanced $85,000 to a stockholder and officer of
the Company in exchange for a note receivable issued by the stockholder and
officer. Half of the note was written off in 1995; the remainder of the note was
forgiven during 1997.
During 1997, in recognition of a Technology Rights Agreement entered into
between the Company and an officer, the Company partially funded the expenses of
a research foundation started by the officer. The officer entered into a loan
agreement with the Company to repay such funding to the Company and to limit the
funding to a maximum of $165,000. The loan is evidenced by a promissory note and
is secured by the officer's owned stock and vested stock options to purchase
common stock. The interest on the outstanding principal balance of the loan is a
variable rate of the prime rate plus 1%. The principal amount and all accrued
interest was originally due on December 1, 1997, but the due date was extended
to December 31, 1999. The Company's Board of Directors has subsequently extended
the due date of the
F-26
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(18) RELATED PARTIES (CONTINUED)
note to June 12, 2000. The Technology Rights Agreement gives the Company the
first right of refusal for ten years of an exclusive, worldwide license to
practice, make or have made, use, sell, distribute and license to others any
invention or discovery related to urine-based diagnostics made by the officer in
exchange for a one-time cash payment and the payment of royalties.
The note from the officer is a full recourse obligation. It is secured by
the officer's stock and employee options in the Company, and requires
maintenance of a collateral value of 200% of the loan value. This maintenance
covenant was not met at all times during 1998 and 1999. However, at all times
the Company had the ability to reach the officer's personal assets which the
Company believed were adequate to provide for payment of the loan. The Company
has also taken a security interest in additional collateral.
In January 1998, the Company entered into an agreement with a venture
capital firm, of which the Chairman of the Board of Directors of the Company is
a general partner, for the services of the Chairman of the Board. The venture
capital firm is also a stockholder of the Company. Under the terms of the
agreement, the Company paid the venture capital firm $50,000 during 1998. The
agreement was not renewed for 1999 or 2000.
(19) COMMITMENTS AND CONTINGENCIES
On November 13, 1998, the Company received a Warning Letter from the FDA
following an inspection by the FDA of the Company's manufacturing facilities in
Berkeley and Alameda, California. On December 11, 1998, the Company responded in
writing to each of the alleged deficiencies cited in the Warning Letter. The
Company subsequently received another letter from the FDA requesting further
responses regarding certain of the alleged deficiencies. The Company responded
to the subsequent letter on June 1, 1999. The FDA conducted a follow-up
inspection of the Berkeley and Alameda facilities on September 28 through
October 7, 1999, which resulted in observations requiring corrective action or
response from the Company. The Company submitted its written responses to the
FDA's inspection observations on November 4, 1999. On March 21, 2000, the
Company received the FDA's request for additional information and is in the
process of responding to the request. If the FDA is not satisfied with the
Company's responses and corrective actions, it could take regulatory actions
against the Company, including license suspension, revocation, and/or denial,
seizure of products and/or injunction, and/or civil penalties or criminal
sanctions. Any such FDA action is likely to have a material adverse effect upon
the Company's ability to conduct operations. In addition, failure of the Company
to satisfy the FDA as to the Warning Letter may adversely affect receiving
approval for manufacturing at the Company's Alameda facility.
In May 1999, the Company received a Warning Letter from the FDA following an
inspection by the FDA of its manufacturing plant in Rockville, Maryland. The
Warning Letter was based upon an inspection of the Rockville manufacturing
facility that was conducted between November 20 and December 11, 1998, which
cited a number of significant observations. On May 24, 1999, the Company
responded in writing to each of the alleged deficiencies cited in the Warning
Letter. On November 19, 1999, the Company received a letter from the FDA stating
that the Company's responses were considered adequate, and the Warning Letter
was formally closed. Between November 30, and December 9, 1999, the FDA
conducted a follow-up inspection of the Rockville facility that resulted in
observations requiring corrective actions or response from the Company. On
January 7, 2000, the Company responded in writing to each of the FDA
observations. On March 21, 2000, the Company received the FDA's request for
additional information and
F-27
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
(19) COMMITMENTS AND CONTINGENCIES (CONTINUED)
is in the process of responding to the request. If the FDA is not satisfied with
the Company's responses and corrective actions, it could take regulatory actions
against the Company, including license suspension, revocation, and/or denial,
seizure of products and/or injunction, and/or civil penalties or criminal
sanctions. Any such FDA action is likely to have a material adverse effect upon
the Company's ability to conduct operations.
(20) SUBSEQUENT EVENT
On March 2, 2000, the Company signed definitive agreements for the sale of
4,096,000 shares of common stock in a private placement that is expected to
raise approximately $8.3 million after deducting the expenses of the
transaction. Approximately one-half of the new financing came from a private
holding company that was not a prior investor in the Company and with which one
of the Company's Directors is affiliated. A representative of the holding
company will join the Company's Board of Directors. The balance of the financing
came primarily from the Company's existing investors. The closing of the
transaction is conditioned upon the effectiveness of a registration statement
that was filed by the Company on March 13, 2000.
F-28
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Calypte Biomedical Corporation:
Under date of March 9, 2000, we reported on the consolidated balance sheets
of Calypte Biomedical Corporation and subsidiary as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1999, which are included in this Form 10-K. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The audit report on the consolidated financial statements of Calypte
Biomedical Corporation and subsidiary referred to above contains an explanatory
paragraph that states that the Company's recurring losses from operations and
accumulated deficit raise substantial doubt about the entity's ability to
continue as a going concern. The financial statement schedule included in this
Form 10-K does not include any adjustments that might result from the outcome of
this uncertainty.
KPMG LLP
San Francisco, California
March 9, 2000
S-1
CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY
FINANCIAL STATEMENT SCHEDULE
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
---------- ---------- ---------- ---------- -------------
YEAR ENDED DECEMBER 31, 1999
Allowance for sales returns and
doubtful accounts receivable......... $-- $ 35 -- -- $35
YEAR ENDED DECEMBER 31, 1998
Allowance for sales returns and
doubtful accounts receivable......... -- -- -- -- --
YEAR ENDED DECEMBER 31, 1997
Allowance for sales returns and
doubtful accounts receivable......... -- -- -- -- --
S-2
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.
CALYPTE BIOMEDICAL CORPORATION
(Registrant)
Date: March 29, 2000 By: /s/ DAVID E. COLLINS
------------------------------------------
David E. Collins
CHIEF EXECUTIVE OFFICER AND VICE CHAIRMAN
OF THE BOARD OF DIRECTORS
and
By: /s/ NANCY E. KATZ
------------------------------------------
Nancy E. Katz
PRESIDENT; CHIEF OPERATING OFFICER, AND
CHIEF FINANCIAL OFFICER
(Principal Financial and Accounting
Officer)
POWER OF ATTORNEY
Each Director of the Registrant whose signature appears below, hereby
appoints David E. Collins and Nancy E. Katz, and each of them individually as
his attorney-in-fact to sign in his name and on his behalf as a Director of the
Registrant, and to file with the Commission any and all Amendments to this
report on Form 10-K to the same extent and with the same effect as if done
personally.
PURSUANT TO THE REQUIREMENT OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW, BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive Officer and
/s/ DAVID E. COLLINS Vice Chairman of the
------------------------------------------- Board of Directors March 29, 2000
David E. Collins (Principal Executive
Officer)
President, Chief Operating
/s/ NANCY E. KATZ* Officer, and Chief
------------------------------------------- Financial Officer March 29, 2000
Nancy E. Katz (Principal Financial and
Accounting Officer)
II-1
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM A. BOEGER
------------------------------------------- Chairman of the Board March 29, 2000
William A. Boeger
/s/ HOWARD B. URNOVITZ, PH.D.
------------------------------------------- Chief Science Officer and March 29, 2000
Howard B. Urnovitz, Ph.D. Director
/s/ JOHN J. DIPIETRO
------------------------------------------- Director March 29, 2000
John J. DiPietro
/s/ PAUL FREIMAN
------------------------------------------- Director March 29, 2000
Paul Freiman
/s/ JULIUS R. KREVANS, M.D.
------------------------------------------- Director March 29, 2000
Julius R. Krevans, M.D.
/s/ MARK NOVITCH, M.D.
------------------------------------------- Director March 29, 2000
Mark Novitch, M.D.
/s/ ZAFAR I. RANDAWA, PH.D.
------------------------------------------- Director March 29, 2000
Zafar I. Randawa, Ph.D.
/s/ NANCY E. KATZ
-------------------------------------------
Nancy E. Katz
(ATTORNEY-IN-FACT)
II-2